Tough road ahead for US

The Straits Times
Nov 17, 2008 | 10:02 AM
Tough road ahead for US

WASHINGTON - THE United States is sinking deeper into the economic doldrums, and it's likely to stay there for a while.

That's part of the latest outlook from forecasters in a survey to be released on Monday by the National Association for Business Economics, also known by its acronym, (NABE).

Approximately 96 per cent of the economists polled believe that a recession has started, and nearly three-fourths think it could persist beyond the first quarter of 2009.

Under one definition, a recession happens when the economy shrinks for two quarters in a row. The economy contracted 0.3 per cent in the third quarter as battered consumers cut back sharply on spending, the government reported last month. It was the worst showing since 2001, when the country was last in a recession.

NABE economists, among other experts, predict activity will continue to shrink in both the final quarter of this year and the first quarter of next year as weary consumers hunker down further under the stresses of rising unemployment, shrinking nest eggs and falling home values.

'Business economists became decidedly more negative on the economic outlook for the next several quarters as a result of the intensification of credit market stresses and evidence of spillover to the real economy', said NABE president Chris Varvares, president of Macroeconomic Advisers.

NABE economists are now forecasting the economy to shrink at a 2.6 per cent pace in the final quarter of this year and then at a 1.3 per cent pace in the first three months of 2009.

The new projections marked downgrades from the association's previous survey, which called for growth of just 0.1 per cent in the final quarter of this year and a 1.3 per cent growth rate in the following quarter.

For all of 2008, the association's economists are predicting the economy's growth will slow to 1.4 per cent, down from 2 per cent in 2007. If the new, lower projection proves correct, it would mark the weakest performance since 2001.

The picture would turn worse in 2009. The NABE economists are projecting the economy will jolt into reverse, shrinking by 0.2 per cent for all of next year. If that happens, it would mark the worst showing since 1991, when the country was starting to pull out of a recession.

With the economy losing traction, the US unemployment rate will climb to 7.5 per cent by the end of next year, the economists predict.

Other analysts think it could rise to 8 per cent at that time, or even hit 10 per cent or higher if a US auto company were to go under.

The nation's unemployment rate bolted to 6.5 per cent in October, a 14-year high, the government reported earlier this month.

To cushion the fallout, the Federal Reserve has slashed a key interest rate, dropping it to just 1 per cent, a level seen only once before in the last half-century.

Fed Chairman Ben Bernanke has warned that the country's economic weakness could last for some time - even if the government's unprecedented US$700 billion (S$1.06 trillion) financial bailout package and other steps do succeed in getting financial and credit markets to operate more normally.

In a speech on Friday, Mr Bernanke left the door open to another rate reduction, warning that financial markets remain under 'severe strain'.

Wall Street investors and economists believe the Fed probably will lower interest rates again on Dec 16, its last regularly scheduled meeting this year, by one-quarter or even one-half percentage point.

The NABE survey of 50 forecasters was taken Oct 28 through Nov 7.

The raft of grim economic news prompted Ms Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, to say in a speech on Friday that the data to date 'tells me that the economy is now in a recession'.

'At the moment, the signs point to a recession beyond just a 'garden variety' downturn', she said. 'The length and severity of the recession will depend on how quickly credit markets return to normal'. -- AP