Friday, March 7, 2008

Watch oil price to predict U.S. recession.

As I predicted, the U.S. economy steped down to a severe recession from the beginning of 2008. The U.S. lost 63,000 jobs in February (See this article).

It has been suggested that there is a tight correlation between crude oil price and U.S. economy trend. I think this point of view is useful to predict U.S. economy in the near future.

As this graph showing, U.S. economy usually experiences recessions soon after the oil price jumped. All of recent recessions (in 1981-1983, 1990-1991 and 2001-2002) were coincided with sudden rises of the oil price. Indeed, the longer the oil price stayed high, the longer U.S. economy continued recessions.

As you know, the oil price in the U.S. is now actually jumping up. Therefore, the important question is how long the oil price stay very high. If we carefully observe the crude oil price, we will be able to predict when U.S. economy will recover. Since the stock market will decline sharply in this and next quarters (I think), if we can see the bottom of the economic wave, we can make more money out from the stock market.

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