The Back Alley Archives

No U.S. growth until third quarter 2009
Thu Nov 20, 2008 9:08am EST
By Burton Frierson

NEW YORK (Reuters) - The U.S. economy will not grow until the third quarter of 2009 and is currently shrinking much more sharply than previously expected as what may be the worst recession in decades tightens its grip, a Reuters poll showed.

Economists downgraded their growth estimates dramatically from just one month ago, since data showed the world's largest economy eliminated 651,000 jobs in the past three months alone and the jobless rate rose to a 14-year high of 6.5 percent.

They predicted the U.S. economy, measured by gross domestic product, would shrink 3.0 percent in the fourth quarter this year, versus the 1.3 percent fall they had forecast for the period in October. A 3.0 percent decline would be the worst since the fourth quarter of 1990.

Not only that, but expectations for inflation next year have been chopped nearly in half to 1.3 percent on average from 2.2 predicted just one month ago, touching a low of 0.5 percent in the third quarter before it starts to rise again.

Those huge changes to the consensus come amid rising fears in financial markets over the threat of deflation -- broadly declining prices across the economy.

The economy's downward spiral looks sure to lead the Federal Reserve to lower interest rates by another 50 basis points next month, which will take the target for the benchmark federal funds rate down to 0.5 percent.

"The economic outlook has taken on a far darker tone over the past few weeks," said Scott Anderson, chief economist at Wells Fargo & Co.

"We have substantially downgraded our outlook for GDP and the labor market to reflect a far steeper recession over the next two quarters."

The worst forecast in the Reuters poll was for a 4.5 percent annualized GDP drop in the current quarter, which would be the worst since the first quarter of 1982.

The poll predicted the economy would shrink by another 1.5 percent in the first quarter of 2009 and would neither grow nor shrink in the second quarter.

That was worse than October's consensus for just a 0.5 percent rate of decline in the first quarter, followed by 1.0 percent growth in the second quarter.

Economists now predict the economy will grow just 0.4 percent in all of 2009 after advancing 1.2 percent and 2.0 percent in the third and fourth quarters respectively.

The broadening economic slump, brought on by bursting of this decade's U.S. housing bubble, also led the Federal Reserve to downgrade its economic outlook, according to figures released on Wednesday.

The U.S. central bank lowered its forecast range for 2008 gross domestic product growth to between zero and 0.3 percent from its June projection of between 1.0 percent to 1.6 percent.

The economy could shrink by 0.2 percent in 2009, according to the lower range of the Fed's central tendency forecast. In June, the Fed had expected the economy would grow by at least 2.0 percent next year.

Economists predicted the Fed would lower borrowing costs next month and hold rates at 0.5 percent through the third quarter of next year. The Fed next meets to set the federal funds rate, which is currently 1.0 percent, on December 16.

The economic deterioration has already eroded inflation, causing U.S. consumer prices to fall at a record pace in October according to data released on Wednesday. The poll forecast this trend would continue.

The poll predicted 2008 consumer price inflation would average 4.2 percent but then tumble to just 1.3 percent in 2009. These forecasts are down from October's median predictions of 4.4 and 2.2 percent.

Rises in the Consumer Price Index are expected to average 3.1 percent in the current quarter, 2.2 percent in the first quarter of 2009, 1.3 percent in the second and fall to just 0.5 percent in third quarter before turning higher.

© Thomson Reuters 2008. All rights reserved.

The country needs a year or two of deflation. Rising prices are a big part of why we are in this mess. Business owners can manage a couple percent of lower prices and it will actually work like stimulus checks to the economy.

Those cats were late on recognizing what was going on, so my bet is the economy rebounds before their projections say it does.

The country needs a year or two of deflation. Rising prices are a big part of why we are in this mess. Business owners can manage a couple percent of lower prices and it will actually work like stimulus checks to the economy.

Isn't deflation a bad thing, though? Wikipedia says:

Most economists agree that the effects of modest, long-term inflation are less damaging than deflation (which, even at best, is very hard to control). Deflation raises real wages which are both difficult and costly for management to lower. This frequently leads to layoffs and makes employers reluctant to hire new workers, increasing unemployment.

Short term deflation isn't bad, IMO. Long term sustained deflation could be bad for the exact reasons that wikipedia says. It raises "real wages". That is great and a shot in the arm for the economy in the short term(1-2%) but if you have lots of prolonged deflation then you might see layoffs. I think that is a myth though unless it got out of control.

You have to keep in mind that we deflated 1%. That isn't a ton. However, last year alone we inflated, I believe, 6.6%(that seems to be the number that sticks in my head).

That means, unless you got a raise of at least 6.6%, you made less "real money" then you did the year before. That is why people got a raise but after they bought groceries, filled up the gas tank, etc. they actually had less money. How many people do you know that get a 7% raise per year? Not many. At some point, things had to balance back out.

This was the exact exchange that Rad and I went thru a few weeks ago. He says prices are down, fuel, homes etc. I contend that they aren't. A house might have fallen in value from $300,000 to $250,000 in the last year but that same house only 3 years before that was selling for $190,000. The prices are still inflated, just not as much. Gas prices are down from $4/gal to $2/gal but just 5 years ago they were under $1/gal. So while it is true that we are experiencing some deflation, I argue that we need several more percent to get things closer to where they should have been in terms of "real money".