http://www.latimes.com/business/la-fi-econ2-2008dec02,0,2587872.story
From the Los Angeles Times
U.S. recession could last into 2010
The group charged with making the official declaration says recession
began in December 2007.
By Maura Reynolds
December 2, 2008
Reporting from Washington — The economy's yearlong downturn, officially
declared a recession Monday, could last well into next year or even
beyond, challenging the government to devise new responses as
traditional methods show limited results.
The National Bureau of Economic Research, the private body charged with
determining the onset of a recession as well as its endpoint, said
Monday that the current downturn met its definition of a recession: "a
significant decline in economic activity spread across the economy,
lasting more than a few months."
The downturn began, the bureau said, at the end of last year as
businesses started slashing jobs -- which they have done every month
this year.
The group did not say how long the recession might last, but the stock
market reflected widespread pessimism. After a widely followed index of
U.S. manufacturing activity fell to its lowest level in 26 years, the
Dow Jones industrials tumbled 679 points, or 7.7%, and the Standard &
Poor's 500 index plunged 8.9%.
"This downturn promises to be the worst since the Great Depression in
the 1930s," said Joshua Shapiro, chief U.S. economist at forecasting
firm MFR Inc. "We've only just started. I can't see bottoming out until
sometime in 2010."
The slide in stock prices ended a five-day rally, the market's strongest
in seven decades, built on hope that the incoming administration of
President-elect Barack Obama could turn the economy around.
"The market got ahead of itself last week," said Scott Anderson, senior
economist with Wells Fargo & Co. in Minneapolis. "But we're back into
our funk again. The fundamentals of the economy still look like things
are going to weaken still further over the next few months."
A psychology of fear has gripped businesses and consumers and is likely
to prolong the recession, said Lee Ohanian, a professor of economics at
UCLA.
"This one has a potential to be longer and deeper than other postwar
recessions," he said. "People are very, very scared and worried. In my
opinion the government has created much more uncertainty about the
economy than it should have done. So it's really hard to tell how long
this recession could last."
Government officials reiterated that they would do what was required to
turn the economy around.
"While we are making progress, the journey ahead will continue to be a
difficult one," Treasury Secretary Henry M. Paulson said.
Federal Reserve Chairman Ben S. Bernanke, addressing the Austin, Texas,
Chamber of Commerce, pledged to use the central bank's full resources to
repair the credit markets and prime the economy.
But "despite the efforts of the Federal Reserve and other policymakers,"
he said, "the U.S. economy remains under considerable stress."
Although the Fed has lowered its benchmark interest rate to only 1%, a
very low level by historical measures, Bernanke said it could be lowered
further. However, that rate doesn't directly affect long-term rates paid
by borrowers. As a result, the Fed is considering purchasing Treasury
bonds on the open market, a move that could bring down long-term
borrowing costs.
"I am not suggesting the way forward will be easy," Bernanke said. "But
I believe that the policy responses taken here . . . will help to
restore confidence in our financial system and place our economy back on
the path to vigorous growth."
The National Bureau of Economic Research, a nonprofit, nonpartisan
group, was founded in 1920 to study the economy and formally designate
each business cycle's peak -- when an economic expansion gives way to a
recession -- as well as each trough -- when growth resumes after a downturn.
Since 1978, the group has had a special committee in charge of the
designation process.
Although a recession is commonly defined as two consecutive quarters of
declines in the gross domestic product -- a measure of all goods and
services produced -- the current downturn doesn't meet that yardstick.
The GDP shrank in this year's third quarter at a 0.5% annual rate but
showed growth of 2.8% in the second quarter and 0.9% in the first quarter.
The bureau, however, uses a larger variety of indicators, including
monthly measures of employment, industrial production and personal income.
Economists say that's because GDP figures can mask economic woes. For
instance, if firms are producing goods, GDP will go up even if no one is
buying them and they are simply going into inventories.
Sung Won Sohn, a professor at Cal State Channel Islands, said the
economy would probably have shown two straight quarters of shrinking GDP
this year if the government hadn't handed out tax rebates as part of an
economic stimulus program.
"The rebates resulted in a blip in the second quarter, and now that blip
is gone," he said.
Job losses appeared to weigh most heavily in the bureau's decision.
The economy normally must create about 100,000 jobs a month to keep pace
with population growth. But lately job creation has been in reverse.
Through October, an average of 120,000 jobs a month have been lost this
year. The unemployment rate stood at 6.5% in October, and many
economists expect the rate to top 8% next year.
"The committee found that economic activity measured by production was
close to flat from roughly September 2007 to roughly June 2008, while
activity measured by employment reached a clear peak in December 2007,"
the bureau said.
The organization's economists "judged that the weight of the evidence"
suggested that the economy peaked -- and the recession began -- in
December 2007.
Reynolds is a Times staff writer.
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