Tuesday, November 11, 2008

U.S. economy expected to contract 0.4 percent in 2009

The headline really says it all in this Marketwatch story:

WASHINGTON (MarketWatch) -- The U.S. economy is expected to shrink 0.4% in 2009 compared with 2008, according to the monthly survey of 49 economists published Monday by Blue Chip Economic Indicators.

The economists also expect contractions in the Japanese, British and euro-zone economies in 2009.

The economists' median forecast calls for U.S. gross domestic product to fall by 2.8% in the final three months of 2008 and by 1.5% in the first quarter of 2009. GDP growth of 0.2% is expected in the second quarter next year.

Measured from the fourth quarter of 2008 to the fourth quarter of 2009, the Blue Chip forecasters expect GDP to rise 0.6%, compared with a forecast of 0.1% from the fourth quarter of 2007 to the fourth quarter of 2008.

"The consensus strongly suggests that the current recession will be deeper and last longer than those of 2001 and 1990-91," said Blue Chip editor Randell Moore in his commentary.

"Some of our panelists believe it may rival the 1981-1982 downturn, but that is not yet the consensus view," he added.

The nation's unemployment rate is expected to average 7.4% in 2009; it was 6.5% in October.

The economists also believe the Federal Reserve will cut the overnight target rate to 0.5% during the central bank's December monetary-policy meeting as a further measure to prop up the economy. Less than 10% of the economists see the Fed cutting rates below 0.5%.

The consensus sees the consumer price index, which tracks inflation at the retail level, rising by 1.5% in 2009 after a 4.2% gain in 2008.

The standard definition of a recession is a decline in Gross Domestic Product for two consecutive quarters. The National Bureau of Economic Research defines a recession as:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.

The U.S. economy has already contracted 0.3 percent for the third quarter of 2008. Economists are now predicting that the U.S. GDP will contract 2.8 percent for the fourth quarter of 2008, and 1.5 percent for the first quarter of 2009. If the economists are correct, this will be three quarters of negative U.S. GDP growth. While the economists are predicting that U.S. GDP will start growing in the second quarter of 2009, I'm thinking it is going to take a lot longer to pull out of this economic morass--perhaps until late 2009 or early 2010. If anything, the U.S. economy will remain sluggish for the rest of 2009, perhaps measuring almost no growth or contraction.

With the amount of bad economic news coming out, I'm not surprised. We've got an enormous housing problem still weighing down this economy, as American homeowners are still facing subprime loans that they can't pay, and houses they are losing to bank foreclosures. Wall Street is still stuck with a pile of underwater securities and CDOs based on the value of worthless home mortgages. The American taxpayer is spending $700 billion bailing out Wall Street. Unemployment has jumped to 6.5 percent. Retail may have to rename Black Friday to Red Friday, considering the slowdown in consumer spending. The Detroit Big Three automakers are asking Congress for a $25 billion bailout package. The U.S. is in an economic clusterfuck here! Let us hope that we've elected a very smart President-Elect Barack Obama to get us out of this mess, because he is going to be stuck up into his eyeballs with this mess.

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