U.S. Economy May Shrink 1.5% in 2009 as Recession Stymies Fed

By Shobhana Chandra and Alex Tanzi

Jan. 13 (Bloomberg) -- Economists slashed forecasts for U.S. growth in 2009 and projected Federal Reserve policy makers won’t be able to start raising interest rates until 2010, according to a monthly Bloomberg News survey.

The world’s largest economy will contract 1.5 percent this year, a half percentage point more than projected last month, according to the median of 59 forecasts in the survey taken from Jan. 5 to Jan. 12. The slump will push inflation below what some Fed officials consider price stability, the survey showed.

“It’s very hard to get anything into place to change the course of the economy in the first half of this year,” said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. “We’re in the middle of something very deep here.”

How quickly the U.S. will pull out of the slide may depend on the $775 billion stimulus package that President-elect Barack Obama is pushing lawmakers to enact next month. The projections indicate he’ll be seeking to halt what may be the longest recession since World War II.

“This is a once-in-a-century crisis, and we’re about to see a once-in-a-century response,” said Ian Morris, chief U.S. economist at HSBC Securities USA Inc. in New York. “We could be in for a wild ride” depending on the timing and size of the stimulus, he said.

Quarterly Forecasts

Gross domestic product dropped at a 5 percent annual pace in the last three months of 2008 and will contract 3 percent this quarter, with a 0.8 percent drop in the next three months, according to the survey median. All estimates were lower than in the previous monthly survey.

Obama’s spending and tax-cut package will result in GDP increasing 3.7 percent more by the end of 2010 than it would without the stimulus, according to a study compiled by his economic advisers. The two-year plan also will generate or save as many as 4 million jobs, according to the report.

“It’s not too late to change course -- but only if we take immediate and dramatic action,” Obama said in a weekly radio address on Jan. 10. “Our first job is to put people back to work and get our economy working again.”

The odds that the economy will be out of the recession in the next 12 months were 55 percent, the survey showed. The slump began in December 2007.

Consumer spending, the biggest part of the economy, may fall at a 1.6 percent pace this quarter after dropping 2.7 percent in the last three months of 2008, the survey showed. Combined with the decline in last year’s third quarter, it would be the first time in the postwar era that spending fell during a nine-month span.

‘Horrendous’ Economy

“There’s nothing good out there for the consumer except cheaper gasoline,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “The economy will be horrendous for the next quarter or two.”

Plunging home values and stock prices have eroded household wealth, and the economy lost 2.6 million jobs last year, the most since 1945. The unemployment rate, which climbed to 7.2 percent in December, will surge to a 26-year high of 8.4 percent by late 2009, the survey showed.

Stocks had the biggest one-week drop since November last week on growing concern over the economy and company earnings.

The first simultaneous recession in the U.S., Japan and euro area means American businesses will keep paring output.

“The worst of the declines in business spending are still to come,” said Peter Kretzmer, a senior economist at Bank of America Corp. in New York.

Holiday Sales

Homebuilders are in the fourth year of a slump and retailers are coming off the worst holiday-sales season in four decades. General Motors Corp. and Chrysler LLC sought government loans to stay afloat.

“It’s going to take several years to pull ourselves out of this,” Dan DiMicco, chief executive officer of Nucor Corp., the largest U.S. steelmaker, said in a Jan. 9 interview. “We know things are getting worse.”

Fed and government efforts to boost growth come at a cost: economists projected the government’s budget deficit for the 2009 fiscal year will reach $1.325 trillion, equivalent to a postwar high of 8.6 percent of GDP, according to the survey.

Prices are retreating as the economy slows. The Fed’s preferred inflation gauge, based on consumer spending and excluding food and fuel costs, will rise 1.2 percent this year, the smallest gain since 1962, the survey showed. The increase would be less than the long-term forecast of 1.3 percent to 1.7 percent that reflects policy makers’ expectations for the level of inflation given “appropriate” monetary policy.

The deceleration, also called disinflation, is less sinister than the persistent decline in costs that economists call deflation. Still, the Fed last month discussed setting an inflation target to discourage expectations that price increases will slow “below desired levels,” according to minutes of the meeting.

“The deflation threat is more real this time around” than the last time policy makers faced similar concerns in 2003, said HSBC’s Morris.

To contact the reporters for this story: Shobhana Chandra in Washington at schandra1@bloomberg.net; Alex Tanzi in Washington at atanzi@bloomberg.net