Recession to worsen, deflation a risk: report

A trader puts his hands on his head, on the floor of the New York Stock Exchange December 5, 2008.
REUTERS/Shannon Stapleton

By Jim Christie

SAN FRANCISCO (Reuters) - The "nasty" U.S. recession will tighten its grip next year as unemployment rises and weak home and stock prices imperil consumers, finance firms and debt-laden businesses, a UCLA Anderson Forecast report released on Thursday said.

Additionally, a sustained retreat in prices for goods and services is a very real possibility that would further drag on the economy, according to the forecasting unit's report.

"Where only last quarter we were worried about inflation, we are now worried about its very rare opposite: deflation," the report said. Falling prices would cut demand and discourage employers from hiring.

"The record collapse in oil prices has brought with it welcome relief to motorists throughout the country and an effective tax cut of $440 billion in the form of a lower oil import bill," the closely-watched report said. "Nevertheless the swift fall in oil prices is now lowering the absolute level of consumer prices and bringing with it likely declines in nominal GDP over the next three quarters."

Where the forecasting unit in summer had projected a "subprime" outlook for the U.S. economy through the end of next year with growth at just above 1 percent, it now sees the economy facing a winter of discontent.

"The news from the economy is bad," the report said. "The recession that we had previously hoped to avoid is now with us in full gale force."

The UCLA Anderson Forecast unit expects real GDP to shrink by 4.1 percent this quarter and by another 3.4 percent and 0.8 percent in the first and second quarters of next year, respectively, as consumer and business spending weaken and as the foreign trade that had propped up growth much of this year sags.

"Because Europe and Japan are already in recession and China and India are suffering from a significant slowdown in growth, the export boom of the past few years will wane," the report said. "Make no mistake the global economy is in its first synchronized recession since the early 1990s."

By late 2009 the U.S. unemployment rate will hit 8.5 percent, compared with 6.7 percent in November, as employers shed an additional two million jobs over the next year.

The historical long-term trend of 3 percent growth will not resume until 2010, the report said.

The administration of President-elect Barack Obama and Congress should act quickly next year to pass an economic stimulus package, said David Shulman, the report's author.

"They're talking a lot of infrastructure, which makes a lot of sense. They're talking a middle-class tax cut. I think when Congress gets through with this they'll be raining money on the economy," Shulman said.

(Reporting by Jim Christie; editing by Carol Bishopric)