Economic outlook dims sharply
A slump seems inevitable, many experts now say. But they differ on its duration.
The US economic outlook is turning bleaker. Instead of asking whether there will be a slump, economists are now wondering how long and how deep the downturn will last.Skip to next paragraph
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According to some models, the economy has a rough first six months, probably contracting or showing almost no growth, then it recovers. More pessimistic economists see the downturn lasting longer, with the unemployment rate moving closer to 7 percent and growth constrained through 2009.
"Why is there so much uncertainty and angst?" asks Mark Zandi, chief economist at Moody's Economy.com. "It's because [the duration of the slump] depends on how deep and broad the problems in the credit market are. And right now, it's impossible to gauge because there is no good information."
Only a few months ago, Mr. Zandi thought there was at least a 50 percent chance the US economy would squeak through this year without a recession. Then the job market collapsed in December, holiday sales were disappointing, and the turmoil in the financial markets grew worse. Now, with economic conditions overseas weakening, he's more gloomy: "Economists all over are downgrading their forecasts and an increasing number have an outright recession forecast."
Those downgrades and forecasts are behind the rush by Congress to pass an economic stimulus package. They are one of the main reasons why the Federal Reserve decided on Tuesday to drop interest rates by three-quarters of a percentage point. And they are one of the reasons why the financial markets on Wednesday remained turbulent.
Even government economists admit the economic sands are shifting quickly. On Wednesday, the Congressional Budget Office projected the economy would grow by 1.7 percent in 2008. But CBO Director Peter Orszag also testified before Congress that "the state of the economy is particularly uncertain at the moment."
The optimists see the economy as rebounding somewhat in the second half. One of those is Bernard Baumohl, managing director of the Economic Outlook Group in Princeton, N.J., who says, "I believe we are in the initial phase of a recession."
But Mr. Baumohl believes the combination of interest-rate cuts and fiscal stimulus will set the groundwork for the economy to begin to come back in the second half. "I think we will see the beginning of a recovery, although it will be a soft one," he says.