Economic Slump in U.S. to Worsen as Consumers Get `Squeezed'

By Timothy R. Homan and Alex Tanzi

Aug. 11 (Bloomberg) -- The U.S. economic slump will extend into 2009 as the longest expansion in consumer spending on record comes to an end, according to a Bloomberg News survey.

The world's largest economy will grow at an average 0.7 percent annual pace from July through December, half the gain in the first six months of the year, according to the median forecast of 50 economists surveyed from Aug. 1 to Aug. 8.

Household spending, which has grown every quarter since 1992, is projected to stall in the last three months of the year as the impact of tax rebates fades, wages fail to keep up with inflation and property values fall. The jobless rate, now at 5.7 percent, will reach a five-year high of 6 percent in early 2009.

``The consumer is very much squeezed,'' said John Lonski, chief economist at Moody's Investors Service Inc. in New York. ``The downside risks swamp whatever the economy's upside potential would be.''

Spending is likely to grow at a 0.6 percent annual pace from July through September, down from a 1.5 percent pace in the previous three months when the arrival of almost $78 billion in tax rebates helped Americans overcome the surge in fuel and food prices. Most of the remaining rebate checks were sent out by mid July.

Analysts say the impact of the rebates, part of a $168 billion economic stimulus plan President George W. Bush signed in February, will be gone by the fourth quarter.

`Lower Spending'

``What's it going to look like once that stimulus runs out?'' said Jonathan Basile, an economist at Credit Suisse Holdings USA Inc. in New York. ``The profile that we think consumers are going to follow over the remainder of the year is one of lower spending.''

Economists anticipate economic growth will keep slowing next year, with gross domestic product expanding 1.5 percent compared with the 1.6 percent projected for 2008. Last month, economists said the economy would grow 1.7 percent in 2009.

The odds of a recession occurring within the next 12 months are 51 percent, little changed from last month's projection, after climbing as high as 70 percent in the April survey.

Slower growth may ease inflation concerns. Consumer prices will rise 4.3 percent this year, the most since 1990, before drifting down to 2.5 percent by the end of the third quarter of 2009, the survey showed.

``The inflation rate is going to come down,'' said Michael Hanson, a senior economist at Lehman Brothers Holdings Inc. in New York. ``The rapid increases in the oil price that we saw earlier in the year are not likely to continue.''

Inflation, Wages

Household incomes will suffer as salaries fail to keep up with inflation. The Labor Department last month said wages in June decreased 0.9 percent after adjusting for inflation, the biggest drop since September 2005, and were down 2.4 percent over the last 12 months.

The decline in buying power is one reason economists forecast spending will slow.

Retailers are feeling the pinch as consumers spend a greater share of their income on food and fuel. Sales at U.S. stores open more than a year grew 2.6 percent last month, the smallest gain since March, the International Council of Shopping Centers said Aug. 7.

Wal-Mart Stores Inc., the world's largest retailer, last week said August sales won't grow as quickly as July's. The company's stock fell the most since 2002 following the announcement.

Rising Unemployment

A weakening labor market also is weighing on consumers. The survey indicates that after rising to 6 percent in early 2009, the unemployment rate will remain at that level through the first nine months of the year. Economists last month forecast unemployment would peak at 5.8 percent.

Payrolls dropped in July for a seventh month, for a total of 463,000 jobs lost so far this year.

The increase in the jobless rate will not prevent Federal Reserve policy makers from raising the benchmark interest rate, economists said.

``The unemployment rate will probably drift upwards, but if it doesn't accelerate, the Fed will probably feel like it can begin safely raising rates,'' said Tom Fullerton, professor of economics at The University of Texas at El Paso. ``It would be surprising if the Fed did not raise short-term interest rates.''

The Fed will keep its benchmark interest rate at 2 percent through March 2009 and then raise it by three-quarters of a percentage point by the end of September, according to the survey. That forecast is unchanged from last month's survey.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.netAlex Tanzi in Washington at atanzi@bloomberg.net