Economic Downturn Probably Eased in First Quarter
April 29, 2009 - 4:57 AM<br />
The government is set to release a report Wednesday expected to show the economy shrank at a pace of 5 percent in the first three months of this year. If Wall Street analysts' forecasts' are correct, the figure -- while still extremely weak -- would be viewed as a hopeful sign that the worst of the recession -- in terms of lost economic activity -- may be past.
"The recession is easing up," said John Silvia, chief economist at Wachovia. "We're probably bottoming out here in the first half of this year."
The economy in the final three months of last year logged its worst downhill slide in a quarter-century, contracting at a 6.3 percent annual rate as nervous American consumers ratcheted back spending in the face of rising unemployment, falling home values and shrinking nest eggs.
The less steep decline in economic activity anticipated by analysts in the January-March quarter is based on the expectation that shoppers at home and abroad didn't pull back quite as much at the start of this year.
Consumer spending, which accounts for roughly 70 percent of national economic activity, is still expected to be negative. But it will probably log a small dip versus the big 4.3 percent annualized decline seen in the final three months of 2008. The same rationale would hold for sales of U.S. exports, which have been crimped as economic troubles in other countries force foreign buyers to be cautious.
Many analysts predict the economy will shrink even less in the current April-June period -- at a pace of 1 to 2.5 percent. Tax cuts and increased government spending on big public works projects included in President Barack Obama's $787 billion should help bolster economic activity. Analysts hope the economy will actually start to grow again in the final quarter of this year.
However, the recent outbreak of the swine flu, which started out in Mexico and has spread to the United States and elsewhere, poses a new potential danger. If the flu stifles trade and forces consumers to cut back further, those negative forces would worsen the recession.
Moving to contain the threat, the White House asked Congress for $1.5 billion to fight a swine flu outbreak. President Barack Obama sent a letter to lawmakers on Tuesday, asking them for a supplemental spending plan to build drug stockpiles and monitor future cases.
Before the flu outbreak, Federal Reserve Chairman Ben Bernanke said the recession could end this year if the government succeeds in stabilizing the shaky financial system and getting banks to lend again.
To combat the worst financial crisis since the 1930s, the Fed has slashed a key bank lending rate to a record low near zero and rolled out a string of radical programs to spur lending. The Fed at the end of its two-day meeting Wednesday is expected to keep its key rate near zero.
Besides the $787 billion stimulus, the administration is counting on its efforts to rescue banks and curb home foreclosures to turn the economy around.
Bernanke and his colleagues have cited "tentative signs" of the recession easing in some consumer spending, home building and other reports. Finance officials from the U.S. and other top economic powers meeting here last week also saw some hopeful signs for the global economy.
Fresh glimmers of hope emerged in the U.S. Tuesday. The Conference Board's Consumer Confidence Index rose far more than expected in April, jumping more than 12 points to 39.2, the highest level since November. And a housing index showed that home prices dropped sharply in February, but for the first time in 25 months the decline was not a record.
Even if the recession were to end this year, the economy will remain feeble and unemployment will keep climbing.
The jobless rate is now at a quarter-century high of 8.5 percent and is expected to hit 10 percent by the end of this year. It will probably rise a bit higher in early 2010 before starting to slowly drift downward. Still, the Fed predicts unemployment will stay elevated into 2011, and economists don't think it will return to normal -- around a 5 percent jobless rate -- until 2013.
More layoffs were announced this week. General Motors Corp. laid out a massive restructuring plan that includes cutting 21,000 U.S. factory jobs by next year. Bearings and specialty steels maker Timken Co. indicated it will cut about 4,000 more jobs by the end of this year after earlier suggesting about 3,000 jobs already had been targeted.
Elsewhere, construction equipment maker Bobcat Co. told nearly 250 workers at its two North Dakota plants they will be laid off indefinitely, executive search firm Heidrick & Struggles International Inc. announced plans to cut more jobs and reduce bonuses and salaries, and Lockheed Martin Corp. said it's cutting 225 jobs at a plant in upstate New York.
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