How deep a recession?

The housing-bubble collapse makes recovery hard to predict.

A surge in layoffs, a sharp pullback in consumer spending, and a credit crisis that drags on despite a massive government rescue have prompted some forecasters to predict the worst economic downturn since World War II.

There's even a flood of commentary harking back to the Great Depression – thankfully not as a forecast but as a cautionary tale for today's policymakers.

But if the US economy doesn't repeat the 1930s, could it revisit conditions last seen in the 1970s or early 1980s? Could it be worse?

The economy's trajectory now, compared with some of those deep recessions, leaves the door open to worse or better outcomes.

The high degree of uncertainty this time stems from the central role played by the fallout from a huge housing-price bubble, which is now buffeting banks and consumers alike. That makes both the depth of the recession and the timing of a recovery hard to predict.

This week, as the Dow Jones Industrial Average closed below 8000 for the first time in nearly six years, the Federal Reserve downgraded its outlook for the economy next year, predicting the unemployment rate to rise above 7 percent. Just three months ago, the central bank's forecast had said joblessness would stay below 6 percent for much of next year.

"The standard recession [in the past] was caused by the Fed raising interest rates to slow inflation," says Dean Baker, an economist at the liberal Center for Economic and Policy Research in Washington. Today, "the basic story is that it's hard to recover from a recession that's caused by a collapsing bubble."

He says that 2001 is the only other time since World War II that the collapse of an asset-price bubble played the leading role in a recession. In that case it was the stock market, especially shares of Internet-related firms.

A great deal of stock-market wealth was wiped out back then, but the recent housing bubble is dealing a harder blow to the whole economy, shaking the foundations of the banking system and affecting the pocketbooks of more consumers.

In many past recessions, consumers retrench because of inflation, high interest rates, or rising unemployment. But many past recessions followed a "v" shape, with a recovery that was swift as consumers unleashed pent-up demand for goods and businesses hired people again.

This time, although the Fed has cut short-term interest rates as it usually does, economists worry not only about how deep the recession will be but how slow a recovery may be.

Even in 2001, with a smaller shock to the economy, "we kept losing jobs long after the recession ended," Mr. Baker says. While often called a mild slump, "it was actually a very severe recession."

Faced with the prospect of another "jobless recovery," many economists today are calling for a significant new government stimulus package. The financial system bailout effort, including a rescue fund that may reach $700 billion in size, is designed to prevent a 1932-style meltdown of the banking system.

A new stimulus would have a different goal – to offset plunging consumer demand.

Signs of economic stress have appeared to reach a crescendo this week:

•New weekly claims for unemployment benefits hit a 16-year high.

•Companies announced significant new layoffs, including 52,000 jobs at Citigroup and 6,000 at Sun Microsystems. It's not just the traditionally cyclical manufacturing and construction jobs that are at risk, but white-collar jobs.

•In two surveys, one by the Philadelphia Federal Reserve Bank and one by the National Association for Business Economics, economists were nearly unanimous that the nation is in recession.

•With credit-strapped consumers pulling back, commercial real estate has joined housing on the list of trouble spots. Some insurance companies have seen their stock prices plunge because they hold bonds backed by commercial mortgages.

Moreover, the global scope of the downturn makes its trajectory hard to gauge. "Everything changed in mid-September. The credit crisis became credit crunch on a global basis," says Ed Yardeni, a longtime Wall Street economist whose firm is based in Great Neck, N.Y. "Now we're looking at a global recession."

He says it's possible that the economy won't end up with unemployment rising to the 9 percent level of 1974 or the nearly 11 percent rate seen in 1982.

But he does see parallels to three decades ago. In the mid-1970s, he says, an oil-price shock and tight credit also hammered consumers, as they have today.

But it's a measure of different times that in the mid-1970s the Federal Reserve was battling inflation, while this week a decline in consumer prices has highlighted the risk of deflation – which can also damage consumer confidence – as consumers and businesses try to scale down on debt.

"The frightening aspect is, if the group responsible for 70 percent of GDP decides to retrench, it is very difficult to offset that" with policy measures, says Vincent Reinhart, an economist at the conservative Heritage Foundation in Washington.

"We could see a protracted increase in unemployment rate," he says. "And remember, the last two recoveries we had were jobless recoveries."

Against the negative swirl, economists also see positive forces at work. Home prices in many cities have fallen nearer to their long-term trend in relation to local incomes. Mr. Yardeni notes that oil prices have been falling, easing one key strain on consumer budgets.

And policymakers will probably continue to craft responses designed to prevent any 1930s-style collapse. "They're not going to want to preside over a depression for the next couple of years," Yardeni says. "We need something that will revive confidence and trust. We all want to get on with our lives and enjoy a period of prosperity again."