Unemployment is soaring, consumer spending is shrinking and both the stock and housing markets are on track for one of their worst years on record. As 2008 comes to a close, the economic outlook for the coming year is pretty grim.
But a panel of economists surveyed by msnbc.com says that — maybe, if all goes well — we could be closer to the end of this recession than the beginning. Now 12 months into a downturn that appears to be deepening, there are early signs that the elements may be coming into place for a convincing recovery. That “best case” forecast calls for the worst of the downturn easing by the middle of next year, with slow but steady growth in the second half of 2009.
“We do have a number of forces that could come together to produce what could be a fairly strong recovery,” said Nariman Behravesh, chief economist at Global Insight.
One of the major forces pushing the economy back on a growth track is a historic series of moves by the Federal Reserve to pump trillions of dollars into the financial system. Another is the huge package of tax cuts and government spending — some believe it could approach $1 trillion — that the incoming Obama administration could have in place by early next year. And the recent plunge in oil prices has provided what amounts to a $250 billion-a-year rebate for consumers who have sharply reined in spending.
“All this put together is massive,” said Behravesh. “So there is now the distinct possibility — if the timing is right — it could all hit at the latest in the second half of the year, and you could actually have a real pop in growth.”
To be sure, the ongoing recession — even in the best case — could go down as one of the worst since the Great Depression. Even if a recovery arrives in mid-2009, job growth will likely lag even as the gross domestic product begins expanding again. And it could take years to repair damage to the financial system and impose regulations to prevent another meltdown.
But as historic as the financial panic and recession turn out to be, the government’s response has been unprecedented.
Since the crisis began in September, the Federal Reserve has let interest rates fall to near zero and announced a variety of measures to flood the economy with cash, trying to fill the void left by the collapse of the credit bubble. The idea is to take the pressure off the battered balance sheets of American companies, banks and households.
The Fed’s efforts have been bolstered by an allocation of $700 billion in taxpayer funds, about half of which has been committed through the Treasury's Troubled Asset Relief Program to help banks, insurance giant AIG and automakers. Though some lawmakers who authorized the program have been frustrated with the continued sluggish pace of private lending, rates have fallen and there are signs the credit markets are beginning to thaw. Last week, 30-year mortgage rates fell to their lowest levels since 1971.
With the benchmark overnight lending rate already near zero, the Fed has pledged to keep pumping cash into the financial system and “employ all available tools” to get the economy growing again.
Getting those trillions of dollars into the hands of consumers and businesses takes time. But as the wave of cash begins to filter down over the next six months, the result could be “an abrupt reversal in conditions by the end of the new year,” according to Mike Englund at Action Economics.
“We have yet to benefit from the effects of TARP investments and Fed efforts to take private sector debt onto the public balance sheet,” he said. “And the new administration may be planning a massive stimulus package of as much as $1 trillion that could hit just as the economy is actually already bouncing.”
Though most of our panelists expect a return to growth in the second half of 2009, there’s less certainty about how strong that recovery will be.
“I think confidence returns by the summer and growth rebounds sharply by year's end,” said Joel Naroff of Naroff Economic Advisors. “I don't believe the economy can get out of this mess by growing slowly and steadily. We need a sharp increase in growth to keep both the financial and real estate sectors of the economy from cratering.”
That sharp increase in growth could be fueled by a pent-up demand, especially for housing. With so many buyers sitting on the sidelines for so long, a clear sign of a bottom in housing prices — along with substantially lowered mortgage rates — could spark brisk demand for housing and revive the moribund homebuilding industry.
Those low rates won't help the millions of homeowners facing foreclosure who are stuck in unaffordable mortgages with onerous "prepayment" penalties; without additional government relief, more than three million more homeowners are expected lose their homes in the next two years. The glut of empty houses could postpone a housing recovery until well into 2010.
But if that foreclosure wave can be stopped, a return to more normal levels of home buying would help spur demand for a variety of other products — from building materials to home furnishings and appliances.
“With massive monetary and fiscal stimulus and a big plunge in energy prices, the U.S. economy may be like a rusty gate: unable to turn in the short run, but then swinging wide open in the second half (of 2009),” said Ethan Harris, co-head of U.S. economics research at Barclays Capital. “Remember, in a normal recovery from a big recession, growth is above 5 percent for a year or so. That sounds like fantasy stuff from where we sit today, but it is possible.”
Economists on the msnbc.com panel were less optimistic about a recovery in the job market. All 12 expect the unemployment rate to end 2009 substantially higher than the current 6.7 percent rate; some see unemployment at 9 percent a year from now.
That pattern follows the performance of the job market in the last two recessions, including the so-called “jobless” recovery after the 1991 recession and the “job loss” recovery of 2001, when the unemployment rate didn’t peak until nearly two years after the economy pulled out of its millennial slump.
“This relates to the intense pressure that a lot of businesses are under to remain competitive and improve productivity,” said Behravesh. “So I think it could very well be that this time around as well we will see job growth lagging the recovery in a significant way."