Obama’s Stimulus Not Enough to Stop Biggest GDP Drop Since 1946

By Timothy R. Homan and Alex Tanzi

Feb. 12 (Bloomberg) -- President Barack Obama’s stimulus plan will be insufficient to avert the biggest U.S. economic decline since 1946 as consumer spending posts its longest slide on record, according to a monthly Bloomberg News survey.

The world’s largest economy will contract 2 percent this year, half a percentage point more than last month’s forecast, according to the median of 50 projections in the survey taken Feb. 2 to Feb. 10. Even as Obama aims to create 3.5 million jobs with a stimulus plan, economists foresee an unemployment rate exceeding 8 percent through next year.

The forecasts underscore the urgency of a financial rescue that unthaws credit markets to spur business and consumer spending, analysts said. A prolonged economic slump means the Federal Reserve will keep its main interest rate below 1 percent for the next two years, the survey indicated.

“Without the stimulus, I think we would be negative for all four quarters of 2009,” causing an even worse decline, said Nigel Gault, chief U.S. economist at IHS Global Insight Inc. in Lexington, Massachusetts. Even with Obama’s plan, consumer spending and the labor market are “spiraling down together,” he said.

Economists said they took into account a stimulus of about $800 billion as they assembled their forecasts. The estimates were submitted before House and Senate lawmakers yesterday reached agreement on a $789 billion bill that includes a mix of tax cuts and government spending. Final passage by both bodies is still needed before Obama can sign it.

Quarterly Forecasts

U.S. gross domestic product will shrink at a 5 percent annual rate in the first three months of this year, with a 1.7 percent contraction from April through June, more than double the last forecast, according to the survey median. That would cap four consecutive quarters of decline, the worst performance since postwar record-keeping began.

All growth forecasts were lower than in the previous monthly survey. The economy is projected to eke out a 1.9 percent expansion next year, followed by 2.9 percent growth in 2011.

Economists estimated odds that the economy will be out of the recession in the next 12 months at 53 percent, down from 55 percent in January, the survey showed. The slump began in December 2007, according to the National Bureau of Economic Research in Cambridge, Massachusetts.

Fed Policy

The Fed’s benchmark interest rate, currently ranging from zero to 0.25 percent, is expected to remain at record-low levels through the end of the year, the survey showed. The Fed rate will rise to 0.5 percent next year and then 1 percent in 2011, economists said. Last month’s survey projected the rate would rise to 1 percent in 2009 and 1.5 percent the next year.

Consumer spending may fall at a 2.7 percent pace this quarter after dropping 3.5 percent in the last three months of 2008, according to the survey. Purchases have never declined for more than three consecutive quarters, according to the data.

Companies from Wal-Mart Stores Inc. to General Motors Corp. this week announced cuts to their payrolls, highlighting the broad reach of the recession.

FedEx Corp., the second-largest U.S. package-delivery company, said it will eliminate 900 jobs in its freight unit.

“The pricing environment has become even more aggressive as the same number of carriers compete for a shrinking base of business,” said Maury Lane, a FedEx spokesman.

Deflation Worries

Prices are moderating 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 least since 1962, according to the survey median.

That increase would be less than the long-term forecast of 1.3 percent to 1.7 percent that reflects Fed policy makers’ expectations for the level of inflation given “appropriate” monetary policy.

The retreat in inflation now surpasses the one in 2003, when the Fed was last concerned about the threat of deflation, or a prolonged decline in prices that erodes profits and makes debts harder to repay.

A deteriorating labor market is causing Americans to retrench and spend less. The unemployment rate is forecast to climb to an average 8.4 percent this year and 8.5 percent next year before retreating to 7.9 percent in 2011.

Job Cuts

“Even if you don’t lose your job you’re less likely to go out and spend, because you’re more likely to be worried about your job,” said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. “Job cuts are going to continue right into 2010.”

The U.S. lost has lost about 3.6 million jobs since the downturn started. The jobless rate rose to 7.6 percent last month, the highest level since 1992, from 7.2 percent in December, the Labor Department said last week.

The federal budget deficit as a percentage of GDP will average 10 percent this year, a postwar high, analysts said, as the administration spends to tackle the recession.

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