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Economy sailing into rougher waters

The latest outlook from U.S. business economists is dire. They see the economy shrinking further in 2008 and next year.
An ice sculpture entitled 'Main Street Meltdown,' is melting on the 79th anniversary of Black Tuesday, the stock market crash that caused the Great Depression, Wednesday, Oct. 29, 2008 in New York.
An ice sculpture entitled 'Main Street Meltdown,' is melting on the 79th anniversary of Black Tuesday, the stock market crash that caused the Great Depression, Wednesday, Oct. 29, 2008 in New York.Frank Franklin Ii / AP file
/ Source: The Associated Press

The country is sinking deeper into an economic hole, 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 Monday by the National Association for Business Economics, also known as NABE.

Approximately 96 percent of the economists polled believe 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 percent in the third quarter as 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 contract in 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 percent pace in the final quarter of this year and then at a 1.3 percent pace in the first three months of 2009. The new projections marked downgrades from the association's previous survey, which called for growth of 0.1 percent in the final quarter of this year and 1.3 percent in the following quarter.

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

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

With the economy losing traction, the nation's unemployment rate will climb to 7.5 percent by the end of next year, the economists predict. Other analysts think it could rise to 8 percent then, It could hit 10 percent or higher if a U.S. auto company were to go under.

The nation's unemployment rate bolted to 6.5 percent 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 percent, 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 $700 billion financial bailout package and other steps do succeed in getting financial and credit markets to operate more normally.

Lower interest rates?
In a speech Friday, Bernanke left the door open for 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 Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, to say in a speech Friday that "the signs point to a recession beyond just a 'garden variety' downturn."

"The length and severity of the recession will depend on how quickly credit markets return to normal," she said.