BW: Economy Slides into Deeper Slump

By James Cooper

Business Week

Dec. 4, 2008

Finally, the National Bureau of Economic Research (NBER) has declared the obvious: The U.S. economy is in a recession. Upcoming economic reports this week will offer more evidence of that, as if any were really needed. The official arbiters of peaks and troughs in the business cycle say the eleventh downturn since World War II began in December 2007.

However, investors are more interested in how severe the recession is, and when will it end. Recent reports show the slump, which started off mild, is now sliding into a much more severe stage.

The government's roundup of November retail sales and preliminary data on December consumer sentiment, both due on Friday, will shed light on the biggest factor dragging down the economy: consumer spending. Weak October outlays put real spending on a path to decline at about a 4% annual rate in the fourth quarter, after the third quarter's 3.7% drop, and November outlays may be even weaker. Already, data show November car sales fell to a 10.1 million annual rate, a 25-year low and down from a paltry 10.6 million October.

Business activity in both manufacturing and services continued to deteriorate in November, according to surveys by the Institute for Supply Management, and not just in the U.S. JP Morgan's composite Purchasing Managers Index of global activity plunged in November, suggesting global GDP is contracting at a 2.7% annual rate this quarter. Thursday's report on October foreign trade will be an important signpost for how badly U.S. exports will suffer amid the weakening global outlook.

Overall, many economists are still downgrading their U.S. growth forecasts, especially given the sharply worse conditions in the labor markets. Given the NBER's December 2007 start date and current expectations for the next few quarters, this recession will very likely be the longest in 75 years. The recessions in 1973-75 and 1981-82, the longest since the Great Depression, each lasted 16 months and came with peak to trough declines in GDP of 3.1% and 2.6%, respectively. Current forecasts generally put the expected depth of the 2007-2009 recession in that ball park.

Despite the gloom, policy efforts will eventually stem the damage. By January, an expected package of fiscal stimulus worth some $500-$700 billion over two years will begin to add about 2 percentage points per year to economic growth. Equally important, the Federal Reserve is pouring billions of dollars into the financial markets. By all signs, the Fed is shifting toward a Japanese-style policy of quantitative easing, meaning it is pumping out more funds to the banking system than needed to maintain it's target interest rate.FNM), Freddie Mac (FRE), and the Federal Home Loan Banks has already sharply lowered mortgage rates and set off a wave of mortgage refinancing. Plus, its plan to make outright purchases of mortgage debt from Fannie Mae (

This is easily the most unique downturn in the postwar era, but the slump is also set apart by the massive policy action aimed at reversing it. Those efforts are laying the foundation for at least a modest upturn in economic growth later next year. Right now, though, that's a hard sell to shell-shocked investors.

Here's the weekly economic calendar, from Action Economics:

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Cooper is BusinessWeek's senior editor and senior economist and writes the influential Business Outlook column.