Economic woes expected to worsen early this year

McClatchy NewspapersJanuary 2, 2009 

WASHINGTON — The economy will get worse before it gets better this year as housing prices continue to fall, unemployment rates rise and the gross domestic product contracts.

That's what economists across the political spectrum are forecasting as Americans start the new year amid the worst economic crisis in at least two decades.

The only question left is what, if anything, a stimulus package promised by President-elect Barack Obama will accomplish. He's pledged upward of $800 billion in public works projects, aid to state and local governments and middle-class tax cuts.

"The whole question is whether can we stop the bleeding in 2009," said Robert E. Scott, senior international economist at the Economic Policy Institute, a nonprofit research center focused on economic issues that affect low- and middle-income people.

"It'll be a down year, and the question is whether that will bleed into 2010," Scott said.

For the average U.S. household wondering how to survive the turmoil, the economic choir sang in unison: Don't take on debt, don't make risky stock investments and play it safe — at least until next year.

Many are predicting that the country's 6.7 percent unemployment rate could reach as high as 10 percent this year and that housing prices have fallen by only about 60 percent of their eventual decline.

Economists also estimate that the U.S. economy contracted by an annual rate of 5 percent in the last quarter of 2008 and could shrink by the same amount this quarter. Official growth numbers for the last quarter of 2008 will be released next week.

The grim news continued Friday, with the trade group the Institute for Supply Management finding that U.S. manufacturing activity fell last month to its lowest level in nearly three decades. Global manufacturing also dropped, according to other measures.

"I doubt there'll be any significant (economic) growth in any quarter," said Barry Bosworth, an economist at the Brookings Institution, a Washington research center. "The unemployment increase will be shocking to most people; 2009 will just be really bad, and it'll be global."

Economists said that the problems that were hitting the U.S. economy were systemic, meaning that there won't be quick fixes.

Plummeting home prices and stock values have squeezed consumer spending, which powers about 70 percent of the country's economic activity. As a result, whole industries — such as the auto and steel sectors — are in peril and unemployment rates have risen.

Even worse, economists don't expect home or stock values to bounce back this year, which means that the nation's main economic engine won't have much fuel to keep it running.

One solution would be stimulating the country's sputtering export sector so that it makes up for lost consumer spending, Bosworth said. However, U.S. exporters are struggling against foreign competition and, since September, the strengthening dollar, which makes U.S. products more expensive overseas.

Pumping up U.S. exports so that they'd replace 3 percent of consumer spending's share of U.S. gross domestic product would take three to five years, Bosworth said.

"Americans were on a consumption binge for the last decade, with huge gains in household wealth through the stock market and home prices," Bosworth said. "That's come to an end, and consumer spending will stay low for several years."

The Obama administration seems to agree, since its proposed stimulus package goes heavy on public works projects, which traditionally take months to go into effect. That suggests the administration thinks that this recession will be drawn out, a view that many economists share.

J.D. Foster, a senior fellow at the conservative research institute the Heritage Foundation, predicted that Obama's stimulus plan won't have any effect. He added that the slowing global economy also could threaten a quick U.S. recovery.

"The right thing to do is to recognize this is a deep recession and that we need to help the economy realign itself," Foster said.

He suggested that the government cut marginal tax rates and help establish more realistic valuations for mispriced assets.

Mark Weisbrot, a co-director of the liberal research center the Center for Economic and Policy Research, said that massive government spending was the key, especially as credit markets froze and consumer spending dropped.

"The government will be the main driver of the economy for the next year or two, and then the rest of the world will recover and the dollar will fall," Weisbrot said. "The economy does revert back to normal over time."

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