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More top economists now forecast recession

Job growth is faltering, consumer confidence plunging. The fallout from the worst housing slump in a quarter-century grows. The signs are unmistakable — the economy is in trouble.
/ Source: The Associated Press

Job growth is faltering, consumer confidence plunging. The fallout from the worst housing slump in a quarter-century grows. Wherever you look, the signs are unmistakable that the economy is in trouble.

Because of all the bad news, more and more economists foresee the country falling into a recession, according to the latest survey by the National Association for Business Economics.

The group said in a report being released Monday that 45 percent of the economists on its forecasting panel expect a recession this year. In September, only one in four economists was pessimistic enough to put the chance of a recession at 35 percent or higher.

The drumbeat of bad news since last fall has caused many analysts to consider a recession more likely now, said Ellen Hughes-Cromwick, chief economist at Ford Motor Co. and NABE’s current president.

The survey shows that 55 percent still believe the country will be able to skate by without falling into an actual downturn, typically defined as two consecutive quarters of declines in the gross domestic output, the broadest measure of economic health. All the analysts, however, expect growth to slow considerably this year.

The forecasters believe GDP will expand by 1.8 percent this year, which would be the weakest growth in five years. That compares with an estimate of 2.5 percent growth for 2008 made in the previous survey, in November.

The new estimate is in line with a downgraded forecast from the Federal Reserve this past week.

The NABE forecast reflects the expectation the economy will grow only sluggishly or actually contract from January through June. Then it is seen starting to expand more strongly in the second half of the year. Helping accomplish that is a $168 billion federal aid plan, with its rebate checks for millions of families, and aggressive interest rate cuts from the Fed.

The panel of 47 top forecasters thinks “any recession, if it occurs, will be short and shallow,” Hughes-Cromwick said.

The biggest change in the new survey involves the outlook for interest rates.

In November, economists expected the Fed would keep a key rate, the federal funds rate, at 4.5 percent through all of 2008. That rate, the target for overnight bank loans, already is at 3 percent, after significant cuts by the Fed in January. Fed Chairman Ben Bernanke has indicated that further rate cuts will be coming if the economy fails to rebound.

So the NABE experts now predict the funds rate will end this year at 2.5 percent.

Inflation is expected to moderate greatly this year as the weak economy cools price pressures. Inflation shot up by 4.1 percent in 2007, the biggest jump in 17 years.

The Consumer Price Index is forecast to rise by 2.5 percent. That is based in part on the NABE panel’s view that demand will weaken for oil and the barrel price will drop to about $84 by December. The current trend, however, is up; crude oil jumped to all-time highs above $100 per barrel over the last week.

The weaker growth will mean higher unemployment, according to the forecasters. They predict that the jobless rate for 2008 will average 5.2 percent, compared with 4.6 percent last year.

Mark Zandi, chief economist at Moody’s and a NABE panelist, said he believed the economy entered into a recession in December and it will pull out of the downturn in June, aided by the rebate checks that begin going out in May.

If problems worsen for the financial industry, hard hit by the housing downturn, then Zandi said Washington will rush through a second rescue measure because nervous politicians will not want to be seen as dawdling before the November elections.

“A recession in an election year represents a problem for incumbents,” Zandi said. “That is why the first stimulus package got passed so quickly and that is why I expect more of a policy response before this is all over.”

A second panel member, David Wyss, chief economist at Standard & Poor’s in New York, also believes the country is now in a recession. While he believes the economic aid plan signed by President Bush should make the downturn a mild one, he worries the economy could falter again next year.

“There is a danger that this could turn into a double-dip recession,” he said. “Once the rebate checks are spent, we could go back down again.”

The latest NABE forecast, however, shows the economy continuing to grow in 2009. It predicts a modest GDP increase of 2.7 percent for the whole year, compared with the 1.8 percent expected this year and the 2.2 percent actual GDP growth in 2007.