Federal Reserve sees recession to at least mid-2009

November 20 12:05:01 PM, LA Times

The central bank indicates interest rates will be cut again soon. The news, along with other economic concerns, sends Wall Street into another panic. Reporting from Los Angeles and Washington Ronald D. White -- Although consumers got some welcome news Wednesday about the prices they pay, the clouds over the economy loomed larger than ever.

Reporting from Los Angeles and Washington Ronald D. White -- Although consumers got some welcome news Wednesday about the prices they pay, the clouds over the economy loomed larger than ever.

The Federal Reserve warned that a recession believed already to be underway could last until mid-2009 or later. That's likely to mean interest rates will be cut again soon, the central bank indicated.

// That, along with other economic concerns including the fate of Detroit's ailing carmakers, sent Wall Street into another panic. The Dow Jones Industrial Average tumbled 427 points, or 5.1%, closing below the 8,000 mark for the first time since early 2003.

The Labor Department reported that consumer prices fell a record 1% last month from September's level, bringing the inflation rate for the last 12 months to a relatively modest 3.7%. Energy prices led the way down with an 8.6% one-month decline.

On their own, lower prices are good for consumers and the overall economy.

Gary Schlossberg, senior economist for Wells Capital Management in San Francisco, said that every $1 decline in the cost of a gallon of gasoline puts $100 billion a year back in U.S. consumers' pockets. So with pump prices down more than $2 since their high in July, that would in effect be a $200-billion stimulus for the economy over the course of a year.

"If you're paying less for gasoline, you have more money left over to buy other things," Schlossberg said.

But in this case, lower costs stem in large part from a global economic contraction that has reduced demand for goods and services, causing inventories to pile up and forcing suppliers to cut prices.

Moreover, the benefit of more affordable energy is easily offset by the shrinking value of consumers' homes and stock portfolios, said Gus Faucher, chief U.S. economist with Moody's Economy.com. For every $10,000 in lost equity, he estimated, consumers spend about $500 less over two years.

"We expect to see consumer spending to be flat before inflation," translating after inflation into a rare decline, he said.

Such gloom pervaded the Fed's release Wednesday of its quarterly economic outlook, which made public the poor projections that led the agency to make two half-point reductions in its key interest rate last month.

Those attending a meeting three weeks ago of the Fed's rate-setting committee "generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009," according to minutes released Wednesday.

The government reported Oct. 30 that the economy shrank at a 0.3% rate in the third quarter of this year.

The Fed policymakers also expected that "the subsequent pace of recovery would be quite slow" and that "the unemployment rate would increase substantially further," the central bank said.

The committee members lowered their economic growth projections for next year to an annualized rate of -0.2% to 1.1%, down from a range of 2.0% to 2.6%.

The central bank even revealed concern that the sudden disappearance of inflation could be a bad thing, alluding to the potential for a catastrophic episode of broad-based deflation, last experienced in the United States during the Great Depression. Some Fed policymakers expressed support for more aggressive rate cuts, saying they would reduce the odds of such an outcome, the minutes say.

The dark economic outlook is leading many people to save more of their earnings to compensate -- another reason that consumer spending has slowed, said Dean Baker, co-director of the Center for Economic and Policy Research.

"People are scared to death," he said.

It makes sense for consumers to rebuild their savings because most were spending beyond their means for the last several years, Baker said. So if the economy is going to get a boost, he said, it will have to come from government spending.

"I'm hoping Congress passes a big stimulus package," he said. "But even if they do, it will only soften the fall."


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