U.S. Slump May Be Longest in Decades as Growth Fell Off `Cliff'

By Bob Willis and Kristy Scheuble

Nov. 12 (Bloomberg) -- The U.S. downturn will be the longest in three decades, and the drought in consumer spending may be the worst ever, according to economists surveyed by Bloomberg News.

The implosion of credit markets last month will cause the economy to shrink at a 3 percent annual rate in the fourth quarter and decline at a 1.5 percent pace in the first three months of 2009, according to the median estimate of 59 economists surveyed Nov. 3 to Nov. 11. Following last quarter's 0.3 percent drop, the slump would be the longest since 1974-75.

``The economy fell off a cliff in October,'' said Richard Berner, co-head of global economics at Morgan Stanley in New York. ``We had a huge financial shock that intensified the credit crunch and triggered a sharp downturn.''

Declines in household spending will extend into next year as the worst financial crisis in seven decades forces employers to keep cutting payrolls on top of the 1.2 million jobs already lost this year. President-elect Barack Obama has said the U.S. needs a second economic stimulus package ``sooner rather than later.''

The pace of contraction this quarter would be the worst since 1990. Berner is among economists projecting the current slump will also be the most serious in a quarter century as the lack of credit causes a reinforcing, vicious circle of declines in confidence, spending and hiring.

``All of these adverse feedback loops are working to reinforce the downturn,'' he said. ``At the moment, it looks like the deepest U.S. recession since '81.''

Some members of the group that officially determines when U.S. contractions begin and end are even more pessimistic.

`Serious Recession'

``We're in for a pretty serious recession,'' Jeffrey Frankel, a member of the business-cycle dating committee of the National Bureau of Economic Research, said in a Nov. 10 interview with Bloomberg Television. ``There's a chance it'll be the worst postwar recession.''

In addition to gross domestic product, the group tracks changes in payrolls, production, income and sales to make their call. The NBER usually declares a recession 12 to 18 months after it starts. The odds of an official contraction occurring within the next 12 months rose to 100 percent, according to this month's survey, up from 90 percent in October.

After dropping at a 3.1 percent pace in the third quarter, consumer spending will fall 2.9 percent this quarter and 1.3 percent in the first three months of 2009, according to the survey median. Spending, which accounts for more than two-thirds of the economy, has never fallen for three consecutive quarters in the postwar era.

Rising Unemployment

Falling demand will cause an even bigger increase in unemployment than projected last month. Economists surveyed forecast the jobless rate will rise to 7 percent in the first quarter of 2009, up from last month's forecast of 6.6 percent. The rate will climb to 7.7 percent by the end of 2009, the highest level since 1992, the survey showed.

The jobless rate rose to 6.5 percent in October, the highest since 1994, the government said last week. Employers cut 240,000 jobs last month and the total number of unemployed Americans jumped to 10.1 million, the highest level in a quarter century.

``The combination of the credit crunch and the rapid decline in consumer spending were the two drivers'' behind the weakening employment outlook, said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina.

The economic slump is contributing to a plunge in commodity prices that spells good news for inflation. Consumer prices will rise 1.8 percent next year, the smallest gain since the last official recession in 2001, after increasing 3 percent this year, the survey showed.

Less Inflation

The diminishing threat of inflation will give the Federal Reserve leeway to lower interest rates again, the survey showed. The benchmark rate, now at 1 percent, is likely to fall to 0.5 percent by March, its lowest level ever.

Obama, in his first post-election press conference, last week said he would follow up on any fiscal stimulus passed by Congress in the last weeks of the Bush administration with further measures after his Jan. 20 inauguration. Already, the government has approved a $700 billion financial rescue package, on top of wide-ranging measures from the Fed to boost liquidity.

``We have taken some major action to date, and we will need further action during this transition and subsequent months,'' Obama said.

U.S. automakers have been among the hardest hit by the slump in spending. Vehicle sales plunged in October for a 12th straight month, the longest streak in 17 years, overwhelming efforts by General Motors Corp., Ford Motor Co. and Chrysler LLC to cut costs by trimming payrolls and shutting factories.

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.netKristy Scheuble in Washington at kmckeaney@bloomberg.net