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US economy's gloom expected to begin lifting by late '09

Until then, employment, output, and housing prices will keep falling.

By Ron SchererStaff writer of The Christian Science Monitor / December 29, 2008

New York

The economic storm that has engulfed the United States – and the world – is expected to continue for most of 2009.

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If there is a silver lining, it is that as the year progresses, economists expect the rate of decline in the economy to start to slow – with some modest growth possible by the last quarter of the year.

Before the skies brighten, however, unemployment will rise, business bankruptcies will accelerate, housing prices will continue to fall, and consumer confidence will remain low, according to most forecasts.

"It's a struggle to say there is an upbeat outlook," says Richard DeKaser, Washington-based chief economist at National City Corp. "We would not call the forecast for 2009 optimistic."

Indeed, the worst of the economic news may be just arriving, economists say. Consumer spending for the holidays will be the worst in years, even with all the store promotions. Stores will continue to offer bargains into 2009 in a desperate attempt to unload inventory. Weak consumer spending will be one of the major reasons the economy as measured by the gross domestic product (GDP) will shrink by as much as 4 to 6 percent on an annualized basis in the fourth quarter.

Lagging economic growth at year-end is not a good sign for the New Year. "You try to get a push off into the next year, and if you don't, it sets the tone," says Dan Meckstroth, chief economist at Manufacturers Alliance/MAPI in Arlington, Va.

By the end of March, the economy, as measured by GDP, will shrink another 4 percent on an annualized basis, estimates IHS Global Insight, an economic forecasting concern in Lexington, Mass. By the second quarter, the annualized rate of decline will slow to 1 percent, according to Global Insight. Then the economy will grow by 1 percent in the third quarter and by 2 to 3 percent in the final quarter of the year.

"You can't stop the economy from contracting in a big way in early 2009," says Nariman Behravesh, chief economist at IHS Global Insight.

Few areas in the US will escape the downdraft, says Mark Zandi, chief economist at Moody's in West Chester, Pa. "It will be touching every industry, every occupation, every corner of the nation."

For example, Moody's now estimates that the economies of 33 states are in recession, with most of the others close to shrinking as well. Less than 22 percent of the nation's metropolitan areas are experiencing job growth, says Mr. Zandi. "That's the smallest percentage since 1975 and I wouldn't be surprised if it falls to a new low in the months ahead," he writes in an e-mail.

The shrinking economy means that unemployment will continue to rise through most of 2009 even if the economy shows a modest gain by year-end. The unemployment rate, currently 6.7 percent, could rise to 8 to 9 percent of the workforce. From peak to trough, Zandi estimates the economy will shed 5 million jobs, mostly likely the worst performance ever.