Looks like the recession is going to be with us for a while longer.
A panel of the National Association for Business Economics (NABE) is expecting the recession to continue through the middle of this year, with large declines in real GDP during each of this year's first two quarters. Cumulatively, the cyclical downturn will rival that of 1973-75.
In the current downturn real GDP is predicted to decline 2.8 percent, slightly less than the 3.1 percent during the early 1970's. This represents a significant markdown of the November forecast, when 60 percent of survey participants expected a decline of 1.5 percent, or less.
The steady drumbeat of weak economic and financial market data has made business economists see the decidedly more pessimistic on the economic outlook for the next several quarters.
Credit conditions remain tight and declines in equity markets and home values, combined with significant job losses, are causing consumers to rein in discretionary spending. The unemployment rate is forecast to rise to 9.0 percent by year-end and inflation is expected to moderate, as economic slack builds and as oil prices are forecast to remain relatively depressed.
The good news is that economic activity is expected to turn up in the second half of the year and 2010 is expected to see modestly above-trend growth of 3.1 percent.
Other highlights of the NABE Survey:
• The auto industry is projected to remain under severe pressure. Auto sales forecasts have been cut to 10.9 million units this year from an already weak 12.5 million estimate in November's survey. Sales in 2010 are forecast to rise to just 13.1 million.
• Housing starts for 2009 were marked down, with 630 thousand units expected to break ground, compared with 870,000 units projected in the November survey. Home prices, as measured by the Federal Housing Finance Agency, are expected to decline 5.3 percent in 2009, following a 6.0 percent drop in 2008, but rise 2 percent in 2010. The good news is that NABE panelists see housing demand stabilizing fairly soon. When asked to identify the bottom in home sales, the panel was optimistic that home sales should trough by mid-2009, as should housing starts, with the latter rising to 900 thousand units in 2010.
• Despite falling exports, foreign trade is still expected to provide a boost to an otherwise weak economy this year. The overall trade gap on a balance of payments basis is now slated to be just $510 billion in 2009 and $530 billion in 2010, well below the $677-billion deficit seen in 2008. The trade-weighted dollar is expected to remain relatively strong this year before losing some of its gains in 2010.
The efficiency of the $787 billion fiscal stimulus package signed into law is a hotly debated topic. Although there is general agreement among NABE panelists that the fiscal stimulus will aid GDP growth in 2009, the growth impact of such actions called forth somewhat guarded responses.
For 2009, 43 percent of the panelists expect that the fiscal impact on real GDP growth will be 0.5 percent or less, but 38 percent project that the government's programs could boost growth by 0.6 percent to 1.0 percent. The impact is expected to last into 2010, yet the panelists are evenly divided on whether real GDP growth will receive a 0.5 percent, 1.0 percent or 1.5 percent boost from the fiscal package.
If the growth dynamics play out as expected by NABE panelists, then the economy should step up to exceed its potential growth rate by 2010. When quizzed separately about estimates of potential GDP growth for the U.S. economy, panelists gave varied responses; 30 percent of panelists pegged potential GDP growth in the 2.25 percent to 2.50 percent range, with 49 percent responding higher than the range and 17 percent lower. The overall distribution of responses suggests a potential GDP growth rate of about 2.5 percent.
The median expectation is that the US economy will grow at a below-trend rate until the first quarter of 2010.