Economists getting gloomier about outlook

John W. Schoen Senior producer • Profile • E-mail

WASHINGTON - Forecasting the economy’s next move has never been easy.

But as an association of business economists and forecasters gathers here for its 50th annual meeting, the group faces the most difficult challenge in its history. Amid the worst credit panic since the Great Depression, the rulebook for giving guidance to their companies and clients is pretty much out the window.

But the experts are giving it their best shot. In their official forecast released Monday, members of the National Association of Business Economists said they expect U.S. economic growth will come to a virtual halt in the fourth quarter. Two-thirds say the U.S economy is in recession or will be by the end of the year — up from a little over half of those surveyed in May.

And unless the credit markets get back on their feet by the end of the year, the group is looking for a GDP drop of 1.1 percent in the fourth quarter and a half-percent drop in GDP for the first quarter of 2009. That would be the first back-to-back quarterly reversal since the last recession ended in 2001.

Still, the group is hopeful things will gradually improve next year with the GDP back to 3 percent growth by the last three months of 2009. (The survey was taken Sept. 8-19 and updated last week.)

“If financial conditions fail to improve quickly, near-term economic prospects could deteriorate markedly,” said Charles Varvares, NABE’s president-elect and president of Macroeconomic Advisors.

As the group was releasing its report Monday, global financial markets were tumbling on concerns about the worsening conditions. London's FTSE index fell nearly 8 percent and the Dow Jones industrials, which were down nearly 800 points in midday trading, ended with a loss of 370 points or 3.6 percent.

On Friday, the government reported the economy lost another 159,000 jobs were lost in September, bringing the total for the year to more than a quarter-million. Ominously, the losses — which had been concentrated in hard-hit industries like housing and finance — have spread across almost every sector.

With wages stalled, home prices falling, mortgage defaults rising and jobs disappearing, the rapidly spreading credit drought is forcing consumers to tighten their belts yet another notch. The latest data suggest consumer spending is “collapsing,” according to Merrill Lynch economist Alex Patelis.

"U.S. oil demand dropped like a rock in September, down 9 percent in the last three weeks," he said in a recent note to clients. "All the evidence suggests a massive retrenchment of consumer spending in September, which will hit the rest of the world badly in due course.”

Cruide oil prices, which only a few months ago were near $150 a barrel, have fallen precipitously and are now below $90.

Retailers and other businesses that rely on short-term credit to finance inventories are getting hit hard. As that credit dries up, businesses that can't buy fresh inventory from cash flow or savings could run out of options fairly quickly. Car dealers — who maintain high-cost inventories while operating on razor-thin margins — have been hit especially hard by the credit drought.

Car dealers were already coping with a slowdown in sales and overcapacity before the credit panic hit. In addition to being shut out of inventory financing, auto buyers are having a harder time getting a car loan, according to Michael Jackson, CEO of AutoNation, the country’s largest chain of car dealers.

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