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US in recession, jobless to peak at 7.5 pct

The US economy is in recession and will contract at a faster pace in the fourth quarter, extending the decline into early 2009 as high unemployment crimps consumer spending, a survey showed.

business Updated: Nov 17, 2008 13:52 IST

The US economy is in recession and will contract at a faster pace in the fourth quarter, extending the decline into early 2009 as high unemployment crimps consumer spending, a survey showed.

The National Association of Business Economists' poll of 50 professional forecasters released on Monday found that real gross domestic product was expected to fall 2.6 per cent in the fourth quarter and slump 1.3 per cent in the first three months of 2009.

Preliminary government estimates showed GDP contracted 0.3 per cent in the third quarter. The results of the survey, which was conducted between Oct. 28 and Nov. 7 indicated growing pessimism among forecasters.

"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.

"Credit conditions continue to be tenuous. Despite the hefty liquidity injections by the Fed and the Treasury, the majority of NABE panelists believe that tight credit conditions will continue."

A month ago, forecasters expected the economy to expand 0.1 percent in the fourth quarter, with the growth pace accelerating to 1.3 per cent in the first quarter of 2009.

Troubles in the US housing sector, emanating from the extension of loans to homeowners with poor credit history, have engulfed the broader economy, resulting in rising job losses and tight access to credit.

ECONOMY IN RECESSION

About 96 per cent of the NABE forecasters believed that the world's economic power house was already in recession. Half of them estimated the downturn started in the fourth quarter of 2007 or in the first quarter of 2008.

More than a third reckoned the recession began in the third quarter of 2008, and nearly three-quarters believed it could persist beyond the first quarter of 2009. Over 60 percent expected the depth of the recession to be contained, with the decline in GDP bottoming below 1.5 per cent.

Overall GDP growth in 2008 was expected to come in at around 0.2 per cent and top 0.7 per cent next year, according to the survey. This compares with predictions of 1.2 per cent and 2.2 per cent respectively in October's survey.

"With the recession continuing into 2009, GDP growth next year is expected to be a meager 0.7 per cent. This would be the slowest growth over a two-year period since the early 1980s," said Varvares, who is also the president of Macroeconomic Advisers.

Despite the gloomy economic outlook, the Federal Reserve would probably keep its benchmark overnight lending rate steady at 1 per cent, raising it by 25 basis points in the last quarter of 2009, according to the survey.

The unemployment rate was likely to peak at 7.5 per cent by the third quarter of 2009, according to the survey. In the October poll, the jobless rate was seen topping out at 6.4 in the second quarter of next year.

The unemployment rate rose to a 14-year peak of 6.5 per cent in October. With the unemployment situation expected to deteriorate, consumer spending, which accounts for about two-thirds of economic activity, would remain depressed.

With household spending weak, auto sales forecasts were slashed to 13.4 million units this year from October's estimate of 14.0 million. Sales for 2009 were likely to fall to 12.5 million instead of rising to 14.2 million, as had been predicted in the October survey.

On an optimistic note, analysts said the housing sales rout was likely to bottom out by mid-2009, but a lot of uncertainty remains as new home inventories run at 10-months' supply, the survey found. Inflationary pressures would be contained as the economic downturn caps demand for oil, it showed.

The Fed's preferred inflation measure, the core PCE index, was seen rising 1.8 per cent over 2009, 0.2 percentage point lower than in the October survey.