Fed says US economy will get worse in 2009
WASHINGTON — The Federal Reserve warned Wednesday that the nation's crippled economy is even worse than thought and predicted it would deteriorate throughout 2009, with no sign that the housing market will stabilize.
The Fed's bleak estimates indicated that unemployment could climb as high as 8.8 percent this year and that the economy would contract for a full calendar year for the first time since 1991.
The central bank's latest projections came hours after a separate report showed that new home construction and applications for future projects both fell to record lows last month.
Still, some economists saw a silver lining in the otherwise dismal housing report: Scaled-back building should reduce the number of unsold homes and contribute to an eventual housing recovery.
The reports raise the stakes for the plan President Barack Obama announced Wednesday to curb foreclosures and ease the broader U.S. housing slump that sent the economy into recession.
The Fed's latest forecast says the unemployment rate will climb to between 8.5 and 8.8 percent this year. The old prediction, issued in mid-November, estimated that the jobless rate would rise to between 7.1 and 7.6 percent.
Many private economists believe the current 7.6 percent jobless rate — the highest in more than 16 years — will hit at least 9 percent by early next year even with the $787 billion stimulus package signed into law Tuesday by Obama.
The Fed also believes the economy will contract this year between 0.5 and 1.3 percent. The old forecast said the economy could shrink by 0.2 percent or expand by 1.1 percent.
The last time the economy registered a contraction for a full year was in 1991, by 0.2 percent. If the Fed's new predictions prove correct, it would mark the weakest showing since a 1.9 percent drop in 1982, when the country had suffered through a severe recession.
The grim outlook represents the growing toll of the worst housing, credit and financial crises since the 1930s. All of those negative forces have plunged the nation into a recession, now in its second year.
"Given the strength of the forces currently weighing on the economy," Fed officials "generally expected that the recovery would be unusually gradual and prolonged," according to documents on the Fed's updated economic outlook.
In another sign of the troubled economy, production at the nation's factories, mines and utilities fell 1.8 percent last month, more than economists expected. That figure, the third monthly drop in a row, was dragged down by a 23 percent drop in production at auto plants and their suppliers.
Meanwhile, construction of new homes and apartments plummeted 16.8 percent in January from the previous month, the Commerce Department said, falling to a seasonally adjusted annual rate of 466,000 units, a record low. Analysts expected a pace of 530,000 housing units.
Building permits, a measure of future activity, also sank to a record low pace of 521,000 units in January, a 4.8 percent drop from the prior month.
"Conditions in the market for new homes have not been this bad since the 1930s, and they continue to worsen," said Patrick Newport, an economist at IHS Global Insight in Lexington, Mass. He predicted that housing starts would remain depressed for months to come.
But other economists saw some glimmers of hope in the report. The sharp cuts in new home building should help reduce inventories of unsold homes, which reached record levels last year, and stabilize home prices, which have been battered by a flood of foreclosed homes on the market.
Abiel Reinhart, an economist at JPMorgan Chase & Co., said that reduced homebuilding lowers economic growth in the short run, "but it does help get inventories down to more reasonable levels."
Builders have cut the number of new homes on the market for almost two years, Newport said, but sales have fallen even more quickly. As a result, the Commerce Department said last month that it would take 12.9 months to sell all the new homes on the market, the longest on record.
That could drop closer to five to six months by the end of this year, Reinhart said, levels that are consistent with a more stable market.
The housing sector also got a boost Wednesday from the Obama administration, which unveiled a $75 billion effort to prevent up to 9 million Americans from losing their homes.
The plan also will double the size of the lifeline the government is providing Fannie Mae and Freddie Mac to $200 billion each as a way of reassuring financial markets of the viability of both mortgage finance giants.
David Crowe, chief economist for the National Association of Home Builders, said the administration's foreclosure program plus help for first-time home buyers included in the stimulus measure would have an impact.
"I do think we will see a bottom in 2009 and by the end of this year we will start to see the beginning of a recovery," he said. "But it will be a slow recovery because of the significant overhang of empty houses for sale."
The Fed was more pessimistic when it released a set of new economic projections and the minutes of its Jan. 17-19 meeting.
Members of the Fed's open market committee "saw no indication that the housing sector was beginning to stabilize," the minutes said.
While falling home prices and historically low mortgage rates have made homes more affordable, the Fed said, "concerns that house prices may fall further appeared to be holding back potential buyers."
Despite the lower unemployment and overall economic projections from the Fed, Joshua Shapiro, chief U.S. economist at MRF Inc., said the growth estimates for this year and next remain "much too optimistic."
The Fed forecast calls for the jobless rate to dip to between 8 and 8.3 percent next year, and to between 7.5 and 6.7 percent in 2011. The normal range for unemployment is around 5 percent.
Employment is usually the last piece of the economy to heal once the country is out of recession and in recovery mode. Businesses are usually reluctant to ramp up hiring until they feel confident that any recovery has staying power.
Under the Fed's new projections, the economy should grow between 2.5 and 3.3 percent next year and by as much as 5 percent in 2011, which would be considered robust.
Shapiro is not convinced. The central bank's forecasts are in the "'hope springs eternal camp,'" he said.
Mar 13, 2009 at 10:11 p.m.
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3 ways to deal with the tremendous debt our government has taken on:
1) Raise taxes...significantly,
2) Inflate our currency...significantly, or
3) Reduce government spending...significantly.
Our current president is the product of one of the most (if not, the most) corrupt political systems in the nation (Chicago). I wonder what would be reasonable for us to expect?
Feb 20, 2009 at 3:27 p.m.
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Kio: Perhaps Obama admitting how far out of touch he really is would be the first step in recovery.
The public speaks the truth with the little faith backing the stimulus. The big "O"s eyes will continue to widen. Let hope that the house of cards lay out well.
Feb 20, 2009 at 1:22 a.m.
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billnewbie:
You are of course correct. Talking down the economy is what leads to a deflationary spiral. It's the classic "why should I buy anything today, when I can get it next week, less expensive". That is why you have awful new housing starts, and big ticket (auto, appliances, ext) sales have fallen off a cliff. No one wants to spend $$ when times are tough, and obviously no one wants to start a business when no one is buying. The result is a downward "spiral" that leads to mass bankruptcies, unemployment, ext . The Great Depression a classic example.
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I'm no Obama fan as most on here know, but I can't really criticize him for talking down this economy. If he talks it up as everything is fine and rosy, he'll be accused of being totally out of touch, and insensitive. Herbert Hoover tried that in the 30's and was just HAMMERED by the media; as having no clue what was happening amongst the working class people; as unemployment ballooned, and soup lines formed all over the country.
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Things are NO WHERE CLOSE to the disaster of the depression, but we honestly have only seen the beginning of this downturn. I could go on and on of the many problems that no one is even talking about, or figuring into their "projections" of the economic future.
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Most know I am a big believer in "rational expectations" when it comes to economic theory. You can read all the "projections" and theory you want, but you can't measure human behavior, which is ESSENTIAL to any economic forecast. My big fear in this whole Keynesian theory via mass government stimulus and take over of free markets, is that the many big $$$$ venture capitalists, who are the REAL backbone of economic growth, are basically just going to throw in the towel, and say screw it, when they see big Daddy government coming. The government in of itself can not pull you out of a recession or depression no matter how much they spend or stimulate. You need confidence amongst the private sector. Confidence that the government is not going to strangle your business with mass taxes, mandates, and regulations.
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Human behavior is so hard to figure, but there are signs. When I see better then 60% of the public thinking this stimulus plan is bad, and just anecdotal evidence of many business people I have talked to; saying they have ZERO confidence in the governments role in this (hence why you have seen all major market indexes sell off), I firmly believe you are just sitting on a situation that is going to get far worse as it progresses. While the government "fixes" are just going to add to the demise.
Feb 20, 2009 at 1:07 a.m.
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the "stimulus plan" is a terrible idea why put even more money into circulation when our dollar is worth nothing already? doesn't this remind anyone of what happened in WWII when germans put currency into circulation and it drove the value of the mark so low that it was costing 300 marks for a loaf of bread, what a great leader we elected, i believe they called what happened super inflation? how about we give some tax cuts to big business so they can afford to hire more people? anyway you look at this its going to get worse before it gets better
Feb 20, 2009 at 12:55 a.m.
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“there are different ways to measure "the economy".”
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Yes there are. However, for a year now this Candidate (now President) and the majority of the Democratic leadership have campaigned on how terrible the economy is; just like Pres Clinton while he campaigned prior to his winning his presidential seat. Nothing makes people start saving and stop spending like the government saying how bad it is---before it is even true. Now they have gotten what they said was coming (asked for) and we are all worse for it. What has changed since they started on this chant “worse since the great depression”; Unemployment has risen, housing prices have fallen, retirement plans shrunk, stock market tanked, banks have collapsed, and people are very scared. Now, I am not saying this is all the result of just those words being said…but, like it or not the government does have influence over the markets just by uttering a spoken word. Watch the market impact every time the fed chairman speaks or a terrible bill is passed. Least of all don’t forget the run on IndyMac when a brilliant Senator from NY said one was about to fall. Until optimism replaces the current talk nothing will change.
Feb 19, 2009 at 6:28 p.m.
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The worse people feel about the economy, the worse it will be. President Obama has an opportunity to "talk up" the economy, but of late he has been talking it down to promote his "stimulus" package. And now there's talk of another "stimulus" later this year. Why would anyone hire for the future, spend disposable income or buy a house or a car when the president and his people make dire predictions of "catastrophe" nearly every day? That's not the kind of leadership we need.
Feb 19, 2009 at 6:17 p.m.
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All of these latest financial crisises have been caused by democrat politicians. Extremely sad and frustrating and the stimulus package wasn't even needed! We should be getting more jobs created by giving businesses, tax cuts so they have the money to create the jobs. We have the highest business tax rate in the world!!!!!!! 35%. It's no wonder we have less jobs and economic woes. where else do you get jobs? Businesses, that's where they come from.
Feb 19, 2009 at 5:31 p.m.
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No,..really?
Feb 19, 2009 at 5:04 p.m.
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RetiredAirForce, there are different ways to measure "the economy". Some of them have not been this bad since the Great Depression. The stock market is one of them:
http://www.ft.com/cms/s/0/bd25ac02-d73a-...
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Housing starts are the worst on record (the comparable record begins with 1959):
http://www.washingtontimes.com/news/2009...
(That's a source you might approve of.)
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December saw the steepest jump in unemployment since World War II:
http://business.timesonline.co.uk/tol/bu...
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There is no reason yet to believe that we are entering a *worse* depression than the 1930s, but we are certainly well into a worse *recession* than has been experienced since then. This is an opinion held by many world economists including the International Monetary Fund (they're mostly conservative, so you should approve).
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We are now 14 months into this recession. The average post-war recession is 18-24 months, but few forecasters believe the bottom is even close yet. 30 or 36 months -- through the end of 2010 -- is a current conventional wisdom expectation.
http://www.guardian.co.uk/business/2008/...
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By the way, the Fed represents the banking industry, not the administration.
Feb 19, 2009 at 1:09 p.m.
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Rule #1 Spark... But hey! I agree.
Feb 19, 2009 at 12:12 p.m.
Feb 19, 2009 at 11:25 a.m.
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"The last time the economy registered a contraction for a full year was in 1991, by 0.2 percent. If the Fed's new predictions prove correct, it would mark the weakest showing since a 1.9 percent drop in 1982, when the country had suffered through a severe recession."
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How can this be true? We were told this is the worst economy since the great depression and without the stimulus bill it would be worse than the great depression. So who is not telling the truth, the administration and congress or the fed?
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