The latest economic data provide mounting evidence that the collapse of the housing market and turmoil in financial markets have tipped the U.S. economy into recession. The question now on the minds of consumers, business owners and politicians: How deep is it going to be, and how long is it going to last?
This week’s report showing a 0.3 percent decline in gross domestic product confirmed that the economy has shifted into reverse. With job losses rising, and consumer confidence falling to levels not seen in decades, the reversal appears to be picking up speed.
The latest bad news came Friday when the Commerce Department reported that personal spending fell by 0.3 percent last month, the biggest decline in more than four years. That followed flat readings in both July and August, contributing to the worst quarterly performance in 28 years.
Although a recession is not official until a panel of economists determines when the economy peaked and began shrinking, many analysts believe a recession has been under way for months.
“We are now entering the harshest part of the recession,” Nigel Gault, chief U.S. economist for IHS Global Insight, wrote in a note to clients after the release of the GDP data.
One reason for concern is that the figures released this week do not reflect the October Panic that swept through the global financial markets as the credit system virtually shut down.
"The economy has deteriorated sharply since that time, particularly in October,” said Diane Swonk, chief economist at Mesirow Financial. “And now, even as credit markets begin to heal, we have to undo that damage, and that damage means that the economy's going to get worse before it gets better."
The Federal Reserve and Treasury have stepped up efforts to get banks lending again, and the Fed this week made another, largely symbolic, reduction in the interest rate target for short-term loans between banks. With that rate now at 1 percent, Fed Chairman Ben Bernanke and his colleagues are running out of ammunition to get money moving again through the financial system.
Congress is debating another economic stimulus package, including proposals to provide hundreds of billions of dollars for overdue upgrades to roads, water projects and sewer systems. That investment will help but probably will not be enough to offset growing gaps in dozens of state budgets. Those deficits will almost certainly being a cutback in state spending and hiring — one of the last sectors of the economy to show growth.
“There simply is no easy out for the financial markets, the economy or policymakers,” Wachovia chief economist John Silvia wrote in a note to clients. “The great American financial workout continues. “
As businesses saw their credit dry up in September, the Fed stepped in to guarantee the so-called commercial paper that big companies rely on to manage their day-to-day cash flow. More recently, consumers are seeing the crunch spread to credit cards, which has begun to put a crimp on their spending. Thursday’s GDP report showed that consumer spending — which accounts for about 70 percent of all U.S. economic activity — fell 3.1 percent in the quarter ending Sept. 30, the biggest drop since 1980.
One big reason is that consumers have less money to spend. Job losses and plunging home equity have eaten into purchasing power. Investors have lost an estimated $2 trillion in retirement savings alone since the stock market embarked on a sickening plunge last month. Rising home equity and an expanding stock market were two of the key factors that fueled the economic expansion that began in late 2001.
The reversal of those factors will make it difficult to get the economy back on track. Efforts to rescue the banking system have focused on building up capital and writing down bad debts. Now American households are embarked on the same painful process by tightening their belts, putting further pressure on consumer spending. It remains to be seen how long that process will take.
“This is going to be a long, protracted retrenchment,” said former Fed Gov. Lawrence Lindsey. “The key is going to be (that) consumers have no choice but to cut back. They can't get the credit that they've used to fund themselves. And so, over two years, I think we're going to see a significant retrenchment in consumer behavior.”
Consumers are also likely to cut back as long as they’re worried about losing their jobs. The unemployment rate already has risen to 6.1 percent from 4.7 percent a year ago, and it is likely to rise further. The jobless rate last peaked at 6.3 percent in 2003, hit 7.8 percent in the 1991-92 recession, and rose to 10.8 percent in 1982.
The economy already has shed at least 760,000 jobs this year; numbers for October will be reported Nov. 7. Other recent recessions eliminated anywhere from 1.6 million to 2.8 million jobs.
Just this week American Express announced plans to eliminate 7,000 jobs and Motorola said it would eliminate 3,000.
There are a few bright spots in outlook. The plunge in oil prices has taken some of the pressure off consumers at the gas pumps. The drop in housing prices continues, but the pace of the decline seems to be slowing, and falling prices appear to be drawing some interest from buyers.
There is little consensus among economic forecasters as to how long this recession will last. A lot depends on how long it takes for home prices to stabilize; news that the government is at work on a comprehensive plan to help reverse the rise in foreclosures could go a long way to helping the housing market find a bottom.
Recent recessions have lasted from eight to 16 months, although there was a period of back-to-back recessions that lasted nearly three years in the early 1980s.
“I think that we are almost a year into this recession,” said Robert Barbera, chief economist at ITG. “So, you could have it ending in the middle of next year and it would be a record length recession."
(The Associated Press contributed to this report.)