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Economists' Panel Sees Prolonged Recession

Roundtable predicts unemployment will rise to 7.5 percent

By Mark Huffman
ConsumerAffairs.com

November 17, 2008

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Hopes for a short, shallow recession are becoming more and more unrealistic, according to the November National Association for Business Economics Outlook.

The consensus of macroeconomic forecasts made by a panel of 50 professional forecasters is for a small contraction in the third quarter of this year followed by a decline in real GDP at a 2.6 percent rate in the fourth quarter. That implies growth of just 0.2 percent in 2008.

With the recession continuing into 2009, the NABE GDP growth next year is expected to be a meager 0.7 percent. This would be the slowest growth over a two-year period since the early 1980s.

The unemployment rate is forecast to rise to 7.5 percent by the end of next year and inflation is expected to moderate, as economic slack builds and as oil prices are forecast to remain relatively contained.

"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, Macroeconomic Advisers.

A dimmer outlook for consumer spending accounted for most of the downward revisions to the overall economic outlook, reflecting a worse outlook for household wealth and income.

For example, the projected value for the S&P 500 index at the end of 2009 was lowered 17 percent compared with the last survey. Home price expectations also were lowered. In addition, the NABE panel's expectation for significantly greater and more prolonged job losses suggests significantly weaker growth of labor income than was expected in October.

In view of the slew of negative economic reports, 96 percent of the NABE panelists believe that a recession has begun. Half of the panel estimates that the recession started in the fourth quarter of 2007 or in the first quarter of 2008; however, more than one-third believes that the recession began in the third quarter of 2008. Nearly three-fourths of the respondents think the recession could persist beyond the first quarter of 2009.

Just over 60 percent of the NABE respondents expect that the depth of the recession should be relatively contained, with a peak-to-trough decline in real GDP of less than 1.5%, with the balance expecting a harsher contraction. Moreover, the recession is expected to reach much of the global economy.

Most of the NABE panelists expect that the U.K., the Eurozone, Japan, Canada, and Mexico either already are in, or will soon slip into, recession. However, China and India are expected to skirt an outright contraction, though a deceleration appears likely.

The auto industry is projected to remain under severe pressure. Auto sales forecasts have been cut to 13.4 million units this year from the prior 14.0 million estimate. Sales in 2009 are forecast to slide to just 12.5 million instead of rising modestly to 14.2 million units.

There is a glimmer of hope amid all this gloom and doom. When asked to identify the bottom in home sales, the NABE panel is evenly split between the current quarter and the next two quarters. Thus, the general expectation is that home sales should trough by mid-2009, as should housing starts.

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