Top economists see the recession ending by fall

A prominent panel of 50 professional forecasters says the US economy is finally stabilizing and the recession should end by this fall. But for the second year in a row, they add, the economy will shrink with a cumulative decline that will give the nation the worst downturn since the last years of the Eisenhower administration.

The drag on the economy is no longer housing or consumer spending. Rather, it’s lagging business investment in inventories, construction, and purchases of equipment as profits have collapsed, say the economists who participated in the quarterly survey of the National Association for Business Economics (NABE).

In fact, despite recent signs in the past several weeks that the rate of decline in the economy is slowing, the economists have lowered their forecasts for the next several quarters compared with their last survey in February. But, despite the lower forecast, the panel expects the economy to start to grow this summer.

“The bad news is mostly behind us,” says Chris Varvares, president of St. Louis-based Macroeconomic Advisers and the president of NABE. “The good news is that the NABE panel expects economic growth to turn positive in the second half of this year, with the pace of job losses narrowing sharply over the remainder of this year and employment turning up in early 2010.”

Joblessness to approach 10 percent

But before the employment rate turns up, the jobless rate, now at 8.9 percent, will get worse, peaking at about 9.8 percent by year-end. That would be the highest rate since the recession of 1981-82, when it hit 10.8 percent. By the NABE estimate, a total of 4.5 million jobs will be lost this year.

Rising unemployment won’t be the only risk to the economy. The group is also concerned about further sharp declines in home values and a lack of improvement in credit conditions. These negative forces are major reasons the group expects that consumers will remain cautious – a feature they think has become a part of the culture at least for the next five years.

The main reason for any economic growth this year is Federal Reserve policy and rising government spending, according to Mr. Varvares.

“You have to credit the Fed and the Obama administration as recognizing we are on the edge of a deep hole and coming up with the appropriate policy response,” he says.

Few worries about inflation, so far

The economic forecasters expect that the Federal Reserve won’t have to worry about inflation in the coming year. Between the slack economy and the rising unemployment rate, the group anticipates core inflation – the inflation rate without food and energy – will come down to 1 percent by the fourth quarter of this year.

With the low inflation rate, the economists anticipate that interest rates will remain unchanged until next spring. At that point, the Fed will start to crank up interest rates from zero today to 1.25 percent. However, one-quarter of the economists expect the rates will be lower and one-quarter expect they will be higher.

One major reason rates will start to rise: a better economy. The economy for the year will grow at a 2.7 percent rate on a fourth-quarter-to-fourth quarter basis. But this is down from the group’s forecast in February, when it anticipated the economy would grow by 3.1 percent next year. And the unemployment rate won’t decline by much, falling to 9.3 percent by the end of 2010. The bulk of the forecasters don’t expect the number of people working to surpass the 2007 peak until 2012 or 2013. The bulk of the forecasters don’t expect the total number of people working to surpass the 2007 peak in employment until 2012 or 2013.

The better economy will slowly help the housing market. The median forecast is for home prices to rise 1 percent in 2010. This would be in contrast to today, when housing prices are falling at a double-digit pace. Yet the forecast on housing is anything but sure – some 40 percent of the economists foresee house prices continuing to decline into 2010 or later.