Credit woes push US closer to recession

Even as lawmakers worked to resurrect a credit-easing rescue plan, economists believe the US is now on the leading edge of a recession.

The trend lines are worrisome, with economic data showing declines in business spending and a hunkered-down consumer and rising unemployment. The only bright spot is exports, helped along by the relatively weak dollar.

The biggest challenge to the economy is the tightening credit markets. On the heels of the failure of Washington Mutual (WaMu), the largest bank failure in US history, short-term interest rates on Friday morning rose to their highest levels since 1984 compared to US Treasury securities.

“I think the credit problems in the US economy increase the probability we are in a recession right now,” says John Silvia, chief economist at Wachovia Economics in Charlotte, N.C. “And it will not be a quick bounce back.”

Even as economists talked about the US moving into an economic slowdown, the Commerce Department reported on Friday that its final revision of second-quarter gross domestic product showed the economy grew at annual rate of 2.8 percent, down from a prior estimate of 3.3 percent.

Since then, the problems in the credit markets have gotten worse. Fannie Mae and Freddie Mac have been taken over by the US government, Lehman Brothers has gone out of business, the giant insurer AIG is trying to sell assets to pay back the US government, and now WaMu has gone out of business.

“I think we will see negative growth in the GDP for the third and fourth quarter,” predicts Gregory Miller, chief economist for SunTrust Banks in Atlanta. Originally, Mr. Miller anticipated the decline would be shallow. Now, he’s not so confident. “I think we might be too light in our estimate,” he says.

Economists anticipate the downturn will begin to accelerate the job losses in the economy. Since the beginning of the year, the US has been losing about 80,000 jobs a month. “Usually, job losses lag the economy,” says Miller.

Already, there are signs that the unemployment rate might be starting to rise, since the number of Americans filing for unemployment claims is growing. The September employment numbers will be released next Friday. “We are probably going to ramp up the job loss to a rate of about 125,000 per month perhaps through the first or second quarter of next year,” estimates Miller. “By the fourth quarter, the unemployment rate could be 6.75 or 6.8 percent with some 3.1 million people unemployed.”

Rising unemployment is a major loss to the economy. As consumers lose jobs or work fewer hours, they have less income to spend. Business watches inventories rise and cuts back production and employment.

“It becomes a self-fullfilling downward spiral and it does not turn around until business sees the light and thinks it’s a good time to start to reinvest with more plant capacity and more demand for labor,” explains Miller.

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