U.S. May Be in for ‘Great Recession,’ Longest Postwar

By Steve Matthews and Timothy R. Homan

Dec. 2 (Bloomberg) -- The U.S. economy, now officially in recession, may be in the midst of the longest slump in the post- World War II era as job losses mount and credit dries up.

The economic slump began in December 2007 when payrolls reached a peak, the business cycle dating committee of the National Bureau of Economic Research, a private, nonprofit group of economists based in Cambridge, Massachusetts, said yesterday. The last time the U.S. was in a recession was from March through November 2001, according to NBER.

“We’re looking at some pretty severe numbers for the fourth quarter, and the first quarter of 2009 will be pretty bad as well,” said Stephen Stanley, chief U.S. economist at RBS Greenwich Capital in Greenwich, Connecticut. “The economy isn’t going to turn around definitively until the credit markets unclog.”

The NBER designation means the U.S. was the first country to have slipped into a contraction. While definitions differ, the economies of both the euro area and Japan fell into a slump in the second quarter of this year, making it the first simultaneous recession in the three regions in the postwar era.

The longest economic slumps since 1945 were the 16-month downturns that ended in March 1975 and November 1982. The Great Depression lasted 43 months, from August 1929 to March 1933.

“This may be referred to as the Great Recession,” because of its length, said Norbert Ore, chairman of the Institute for Supply Management’s factory survey. “It looked like we were headed for a shallow recession earlier in the year because of higher energy prices. With the meltdown in the financial sector, it has become something more serious.”

Manufacturing Slump

American manufacturing contracted in November at the steepest rate in 26 years, the ISM said yesterday. The Tempe, Arizona-based group’s report came as factory indexes in China, the U.K., euro area, and Russia all fell to record lows.

Federal Reserve Chairman Ben S. Bernanke, a former member of the NBER panel, said yesterday the economy “will probably remain weak for a time” and the Fed may use unconventional methods, such as buying Treasury securities, to spur growth.

“We have gone through in the last year a remarkable set of events, ranging from housing market to credit market to financial market shocks,” James Poterba, president of the NBER and an economics professor at the Massachusetts Institute of Technology, said in an interview. “The collection of shocks is a very rare coincidence. It is not terribly surprising you might get a longer-than-average downturn.”

Job Losses

The loss of 1.2 million jobs so far this year was the biggest factor in determining the starting point of the U.S. recession, the NBER said. By that measure, the contraction probably deepened last month.

Payroll employment probably fell by 325,000 in November, the most since the last recession, according to the median forecast of economists surveyed by Bloomberg News ahead of a Labor Department report due Dec. 5. The jobless rate is projected to increase to 6.8 percent, the highest level since 1993.

U.S. employers cut 240,000 jobs in October, a 10th consecutive decline. The unemployment rate rose to 6.5 percent, the highest level in 14 years, according to Labor Department statistics.

“It is clearly not going to end in a few months,” Jeffrey Frankel, a member of the NBER committee and a professor at Harvard University, said in an interview. “We would be lucky to get done with it in the middle of next year.”

Second Bush Slump

The contraction is the second under President George W. Bush’s watch, making him the first U.S. leader since Richard Nixon to preside over two recessions.

Lawrence Summers, President-elect Barack Obama’s pick for White House economic adviser, said the economy is getting worse and requires more legislative action.

“Recent economic evidence suggests that the pace of this downturn is accelerating,” Summers said in a statement. He said Obama wants to enact a recovery package “soon after taking office.”

Although a recession is conventionally defined as two quarters of successive contraction in gross domestic product, the private committee doesn’t require supporting GDP data to make a recession call. Its members focus on month-to-month changes in the economy.

The NBER committee defines a recession as a “significant” decrease in activity over a sustained period of time. The decline would be visible in gross domestic product, payrolls, industrial production, sales and incomes.

The U.S. economy shrank at a 0.5 percent pace in the third quarter after expanding 2.8 percent in the previous three months. Economists at Goldman Sachs Group Inc. and Morgan Stanley in New York are among those projecting the economy will contract at a 5 percent pace this quarter.

“The recession is likely to last at least into the summer of 2009,” said Conrad DeQuadros, a founding partner at RDQ Economics in New York. “Even as the economy begins to recover, it’s likely to still fell like a recession, and the unemployment rate is still likely to rise.”

To contact the reporters on this story: Timothy R. Homan in Washington at thoman1@bloomberg.netSteve Matthews in Atlanta at smatthews@bloomberg.net