U.S. recession may be deepest since 1970s

By Emily Kaiser, Reuters

WASHINGTON — The U.S. economy is showing disturbing similarities to patterns seen in the painful recessions of the mid-1970s and early 1980s and it may be a year or more before it resumes anything near normal growth. Factories are filling fewer orders, companies are cutting jobs and consumers are tightening budgets so dramatically that economists now think the economy will shrink for three straight quarters — something that has not happened in 33 years. “We now have a consistent series of reports telling us that the deteriorating job market, falling incomes, collapsing stock market, plummeting home values, and the credit crises have forced Americans to shut down spending,” said Bernard Baumohl, chief economist with the Economic Outlook Group in Princeton, New Jersey. “Everyone, it appears, is now hunkering down in preparation of a painful recession.” A Reuters survey of economists found most think the economy contracted in the recently ended third quarter and that growth will not resume until the second half of 2009. Even then, the recovery is likely to be subdued at best. The poll, released on Thursday, was taken after governments across the Group of Seven rich nations nationalized swathes of the banking sector and after the world’s major central banks slashed interest rates in unison in an unprecedented move. Gary Stern, president of the Federal Reserve Bank of Minneapolis, said the current episode may be worse than the 1990-91 recession, when the economy contracted for two consecutive quarters and growth was tepid for about two years. “In view of the scope and severity of the recent financial shock, the restraint on economic activity stemming from credit market headwinds could exceed the experience of the 1990s,” he said on Thursday. At the worst of that recession 18 years ago, gross domestic product, the broadest measure of economic activity, dropped by 3 percent in the fourth quarter of 1990 and remained subpar until the first quarter of 1992. Economists polled by Reuters think the current downturn probably won’t be as deep, bottoming at a minus 1.3 percent in the current fourth quarter, but it will probably be 2010 before growth gets back to normal trends. While the median forecast calls for three consecutive quarters of contraction, the most pessimistic views show the possibility of no growth for 18 months, something that has never happened in U.S. economic data going back to 1947. The job market gives an even gloomier signal. The current unemployment rate of 6.1 percent is higher than in July 1990, when that recession began. Economists think the jobless rate is heading to 8 percent or perhaps higher next year. That would be the worst since 1983, when the economy was recovering from the second of back-to-back recessions.

Data on Thursday showed that the manufacturing sector in the Mid-Atlantic region crashed to an 18-year low in October, and new orders were the weakest since 1980. U.S. industrial production posted the biggest monthly decline in 34 years last month.