US economy's gloom expected to begin lifting by late '09
Until then, employment, output, and housing prices will keep falling.
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It could be worse. Even though business is trying to cut expenses, some companies are trying to do it creatively, says Mr. Behravesh. "Some senior executives at places like Federal Express and Caterpillar are taking big pay cuts, and some workers are taking time off without pay," he explains. "As companies have learned, it's expensive to fire workers and then retrain them again."Skip to next paragraph
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One of the areas likely to be worst hit is manufacturing. Economists consider industrial production to be one of the best gauges of the sector. Mr. Meckstroth estimates it will fall 1.4 percentage points on an annualized basis this year. Next year is worse, with a drop of 4.2 percent. "If you don't include high tech, then industrial production will fall 6.3 percent," he estimates. "Most of that decline will occur in the first half of 2009."
A good portion of the decline in industrial production is from falling business investment. "Business is cutting spending as fast as it can," he says.
The auto sector, in particular, is expected to shrink, even with bailout money from the government. For example, Meckstroth says Chrysler is expected to merge with another automaker. "They have pretty much admitted they don't expect to operate on their own," he says.
However, once the economy starts to improve, he anticipates that the automakers will benefit. "We are seeing building pent-up demand," he says. "The automotive fleet is getting older and repairs cost so much it's cheaper to replace vehicles."
The weak economy means consumers are likely to continue to get a break at the gas pump. The Energy Information Administration is estimating regular grade gasoline will average $2.03 a gallon, down from about $3.27 a gallon in 2008. "That will convert into a 1 percent tail wind for the economy in 2009," says Mr. DeKaser.
Before the economy turns around, Congress is expected to have passed a two-year fiscal-stimulus package that could be close to $800 billion. Zandi estimates some of it might be some form of tax cut that moves into the economy right away. The same would be true of an increase in food-stamp eligibility and perhaps an increase in Medicaid funds to the states.
The incoming Obama administration, which has set a goal of creating 3 million jobs in two years, is also expected to ask for a sharp increase in infrastructure spending.
"If they do shovel-ready infrastructure, that can be spent pretty quickly," says Alice Rivlin, a senior fellow at the Brookings Institution in Washington. "But it would be ill-advised to do too much of that."
Instead, she would like to see Congress spend some time planning the types of spending the nation needs. "For example, there are new things like medical technology where the money does not get spent right away, but it's an investment in the long-run rate of growth of health spending. It's not conventional stimulus."
The sharp rise in government spending may come at a cost to the economy, worries Axel Merk of Merk Hard Currency Fund in Palo Alto, Calif. "It will make it more difficult for the corporate sector to raise money," he predicts. "There is a huge amount of corporate debt to be rolled over next year."
Mr. Merk says banks' aversion to making loans will continue into 2009. As the year ends, corporate bond spreads – that is the difference between Treasury bills and investment-grade corporate debt – are at a record high. "I think financial institutions are in a survival mode and that will continue," he says.