Top economists see signs of recession

Updated: 2008-02-25 17:10

The biggest change in the new survey involves the outlook for interest rates.

In November, economists expected the Fed would keep a key rate, the federal funds rate, at 4.5 percent through all of 2008. That rate, the target for overnight bank loans, already is at 3 percent, after significant cuts by the Fed in January. Fed Chairman Ben Bernanke has indicated that further rate cuts will be coming if the economy fails to rebound.

So the NABE experts now predict the funds rate will end this year at 2.5 percent.

Inflation is expected to moderate greatly this year as the weak economy cools price pressures. Inflation shot up by 4.1 percent in 2007, the biggest jump in 17 years.

The Consumer Price Index is forecast to rise by 2.5 percent. That is based in part on the NABE panel's view that demand will weaken for oil and the barrel price will drop to about $84 by December. The current trend, however, is up; crude oil jumped to all-time highs above $100 per barrel over the last week.

The weaker growth will mean higher unemployment, according to the forecasters. They predict that the jobless rate for 2008 will average 5.2 percent, compared with 4.6 percent last year.

Mark Zandi, chief economist at Moody's and a NABE panelist, said he believed the economy entered into a recession in December and it will pull out of the downturn in June, aided by the rebate checks that begin going out in May.

If problems worsen for the financial industry, hard hit by the housing downturn, then Zandi said Washington will rush through a second rescue measure because nervous politicians will not want to be seen as dawdling before the November elections.

"A recession in an election year represents a problem for incumbents," Zandi said. "That is why the first stimulus package got passed so quickly and that is why I expect more of a policy response before this is all over."

A second panel member, David Wyss, chief economist at Standard & Poor's in New York, also believes the country is now in a recession. While he believes the economic aid plan signed by President Bush should make the downturn a mild one, he worries the economy could falter again next year.

"There is a danger that this could turn into a double-dip recession," he said. "Once the rebate checks are spent, we could go back down again."

The latest NABE forecast, however, shows the economy continuing to grow in 2009. It predicts a modest GDP increase of 2.7 percent for the whole year, compared with the 1.8 percent expected this year and the 2.2 percent actual GDP growth in 2007.

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