(AP) The U.S. economy is expected to slide backward at a staggering pace of 5 percent in the current January-March quarter, according to the latest survey by the National Association for Business Economics released Monday. That’s a sharp downgrade from the 1.3 percent annualized drop previously projected by the group.
“The steady drumbeat of weak economic and financial market data have made business economists decidedly more pessimistic on the economic outlook for the next several quarters,” said NABE President Chris Varvares, head of Macroeconomic Advisers. All told, Varvares and his fellow forecasters now expect the economy to shrink by 1.9 percent this year, a much deeper contraction than the 0.2 percent dip projected in the fall.
The unemployment rate – now at 7.6 percent, the highest in more than 16 years – is expected hit a peak of 9 percent this year, the group said. If the new forecast is correct, it would mark the first time since 1991 that the economy actually contracted over a full year and would be the worst showing since 1982, when the country had suffered through a severe recession. Vanishing jobs, shrinking nest eggs, rising foreclosures and tanking home values have forced American consumers to cut back, which in turn has caused businesses to lay off workers and slash costs in other ways, feeding a vicious downward cycle for the economy.
The current recession, which started in December 2007, is posing a major challenge to Washington policymakers, including President Obama and Federal Reserve Chairman Ben Bernanke. That’s because its root causes – a housing collapse, credit crunch and financial turmoil – are the worst since the 1930s and don’t lend themselves to easy or quick fixes. “As the news on the economy has darkened, so, too, have the forecasts,” said Ken Mayland, president of ClearView Economics. “We are suffering a period of maximum stress on the economy.”
The economy is expected to remain feeble this year – even with new efforts by the administration and Congress to provide relief. Just over the past few weeks, a $787 billion recovery package of increased government spending and tax cuts was signed into law, the president unveiled a $75 billion plan to stem home foreclosures and Treasury Secretary Timothy Geithner said as much as $2 trillion could be plowed into the financial system to jump-start lending. In terms of lost economic activity in 2009, the biggest hit will come in the first six months, forecasters said. “Further pronounced weakness in housing and deteriorating labor markets underscore the risks for 2009,” Varvares said.
Many economists believe that the current quarter will be the worst of the recession in terms of the bite to gross domestic product, which is the value of all goods and services produced within the U.S. and is the broadest barometer of the country’s economic health. The second quarter of this year also will be a lot weaker, with the forecasters now calling for the economy to contract at a 1.7 percent pace, compared with the prior projection of 0.5 percent growth. In the second half of this year, the economy should expand, but still less than what economists thought just a few months ago. NABE forecasters believe home sales and housing construction should hit bottom by the middle of the year, which would help stabilize the economy. Home prices, however, are expected to keep falling, according to other experts.