The worst credit crisis since the Great Depression sent the US economy into a tailspin at the end of 2008 as consumers and businesses retrenched, reports this week may show.
Gross domestic product contracted at a 5.5 per cent annual rate from October through December, the biggest drop since 1982, according to the median estimate in a Bloomberg News survey ahead of Commerce Department figures due January 30.
President Barack Obama and Congress are working to pass an economic stimulus plan worth $825 billion by mid-February to stem what may be the worst recession in the postwar era. Federal Reserve policy makers, under Chairman Ben S Bernanke, also meet this week amid growing expectations they’ll unveil more tools to unclog lending after having cut interest rates to as low as zero.
The recession “entered a more negative and pernicious phase in the forth quarter,” said Brian Bethune, director of financial economics at IHS Global Insight in Lexington, Massachusetts. It’s “potentially the worst recession that we’ve seen in terms of the severity and the depth.”
The projected contraction last quarter would follow a drop of 0.5 per cent at an annual pace in the prior three months.
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The economic downturn helped Obama win the election in November as his message of change resonated with voters. The legislation being hammered out with Congress includes tax cuts and new federal spending for infrastructure projects that the administration hopes will create or save 4 million jobs.
After starting in housing, the recession has spread to households. Consumer spending, the largest part of the economy, is forecast to have dropped at a 3.5 per cent pace last quarter after slumping at a 3.8 per cent rate the previous three months. It would be the first time purchases declined more than 3 per cent in consecutive quarters since records began in 1947.
Wal-Mart Stores Inc Chief Executive Officer H Lee Scott said January 12 that the first half of 2009 will be “extraordinarily challenging.”
“Some people are giving up eating out; some people are giving up movies; some people are giving up other things like shopping,” Scott said. “Those are fundamental changes that will continue.”
The world’s biggest retailer said this month that fourth- quarter profit will miss its forecast and predicted revenue in January will be little changed.
Circuit City Stores Inc, once the biggest US electronics retailer, said January 16 it will shut down all of its 567 US stores after failing to find a buyer that would keep the chain in operation.
Spending is projected to keep dropping in the first six months of 2009, according to a Bloomberg survey.
Consumers are losing confidence and retrenching as the labor market weakens. The US lost 2.6 million jobs last year, the most since 1945. The unemployment rate climbed to 7.2 per cent in December, the highest in almost 16 years.
A report from the Conference Board on January 27 is projected to show consumer confidence this month held near a record low. A similar report from Reuters/University of Michigan three days later may show sentiment held near the lowest level in almost three decades.
Household wealth is evaporating as foreclosures push down home prices. Property values in 20 US cities fell in November at the fastest pace on record, economists forecast figures from S&P/Case-Shiller on January 27 will show.
Home sales keep falling as property values plummet and the credit freeze restricts lending. A report from the National Association of Realtors tomorrow may show purchases of previously owned homes fell 2 per cent in December to a record low of 4.4 million at an annual pace, according to the survey median.
New-home sales, due from Commerce on January 29, probably dropped 3 per cent last month to a 395,000 pace, the lowest level since 1982, according to the survey.
The global slowdown in demand is hurting US manufacturers. Commerce may report on January 29 that orders for durable goods, those meant to last at least three years, fell in September for a third consecutive month, according to the survey.
Fed policy makers meet on January 27 and 28 to discuss their outlook for economic growth and prices. Economists will comb through the announcement following the second day of the meeting for indications on whether the Fed will broaden the range of assets it’ll purchase to unclog credit markets, commit to buying long-term Treasuries or establish some sort of inflation target.
“The case for credit easing remains intact, and we expect the Fed to continue to pursue this policy aggressively in coming months,” said Dean Maki, co-head of US economic research at Barclays Capital Inc in New York.