"For the average American it’s going to be devastating..."

http://www.nytimes.com/2008/12/08/business/economy/08econ.html?_r=1

In String of Bad News, Omens of a Long Recession

By MICHAEL M. GRYNBAUM
Published: December 7, 2008

Despite months of rescue efforts, hundreds of billions of dollars in government spending and an avant-garde apparatus of financial tools, the American economy has only worsened, and at a faster rate than nearly anyone predicted.

This recession, which officially began in December 2007, now appears virtually certain to be the longest downturn — and possibly most severe — since the end of World War II, as evidenced last week by a demoralizing rat-a-tat of grim reports on jobs, sales and public confidence.



The reports signaled that even after 11 months, more than the entire length of the last two downturns, this recession has only now entered its fiercest phase, and economists say the pain will not end soon.

“For the average American it’s going to be devastating for the next 6 to 12 months,” said Bernard Baumohl, chief global economist at the Economic Outlook Group, a research and forecasting firm. He added, “I have not seen anything particularly hopeful right now, which tells me we have a ways to go.”

In an appearance Sunday on “Meet the Press,” President-elect Barack Obama promised a stimulus plan “large enough to get the economy moving,” but conceded that “things are going to get worse before they get better.”

Some analysts had hoped the worst was over after October’s market shocks, which spooked consumers and choked off credit.

Instead, Americans retrenched even further in November, sending sales at the nation’s retailers tumbling to the weakest level in more than 35 years and leading the Detroit automakers to record their worst sales in a quarter-century. Manufacturers have not seen conditions this bad since 1982.

The decline in spending is likely to continue, depriving the economy of its primary growth engine, as layoffs continue to mount. Half a million Americans, from financial analysts to factory workers, were dismissed in November alone. Rarely has a labor downturn affected such a broad swath of income levels.

Most frightening of all is that the worst job losses may be yet to come. If history is any guide, millions more Americans could lose their jobs before businesses start to expand again.

The worst jolts to the labor market tend to be only the precursor of six months or more of additional layoffs. Employment suffered a major contraction in December 1981 and January 1982, and workers did not see a stable market for about 10 months, including another big round of layoffs in July 1982.

A similar pattern occurred in the other great postwar recession, in 1974, when several months of a stagnant labor market were followed by a violent contraction over the new year. After the worst month, December 1974, the job market took about six more months to stabilize.

So in the best case — where November’s 533,000 lost jobs signals the bottom of the labor market contraction — workers could face six more months or so of hard times.

“We’ll be lucky if the unemployment rate is below double digits by the end of next year,” said Jared Bernstein, who will be the chief economic adviser to Vice President-elect Joseph R. Biden Jr. “Even if the economy improves, the growth won’t be enough to rehire laid-off workers, much less absorb those coming into the labor force.”

There is no guarantee, of course, that November’s numbers will be the worst of the current round of layoffs. Even before Lehman Brothers collapsed, employers were on the defensive, cutting more than 400,000 jobs after Labor Day.

Now that the full magnitude of the financial crisis is apparent, companies are tightening their belts further. Just last week, AT&T, Credit Suisse, DuPont and Viacom announced deep cuts. Layoffs are expected in the financial and automotive industries after the new year.

“This current environment requires action, and that’s what we’re doing,” said Mohammed Nakhooda, a spokesman for Nortel Networks, the maker of telecommunications equipment, which has lost business this fall from large corporate clients cutting costs.

Nortel, based in Toronto, said it would cut about 1,300 jobs, or 5 percent of its work force, including some at its United States operations. It will also begin a hiring freeze and cut back on employee travel.

“It’s tough but it’s necessary,” Mr. Nakhooda said. “The business environment has obviously changed pretty drastically over a short period of time.”

Some economists predict that the economy could lose as many jobs in the first six months of 2009 as the entirety of 2008. Nearly two million jobs have been lost since the start of the recession last year, two-thirds of them since September. Still, some forecasters say the pessimistic talk may be overblown, and possibly a problem in itself.

“The numbers are giving us a darker view than is actually the case,” said Chris Varvares, president of Macroeconomic Advisors, a research firm, adding that some of the economic indicators that have been flashing red are based on subjective surveys of businesses and households.

“There is such a thing as self-fulfilling prophecy,” he said.

Americans who are lucky enough to still collect a paycheck are likely to save more, cut back on luxury items and restaurants, and channel more of their income into savings accounts for college and retirement.

“Even Americans who still have a job are looking around and saying, ‘Well, you know, how much longer?’ ” said Joshua Shapiro, chief domestic economist at MFR, a research firm.

All of this is likely to make many people hesitant to invest any money they do have. Many Americans chose to save over the last two decades by investing in stocks and real estate. Now, the jar-in-the-kitchen approach may return, analysts said.

“It is quite conceivable — many would say probable — that the severe asset price collapses that have occurred in both equity and real estate will prompt a lasting increase in the desired saving rate, at least on the part of many consumers,” Ed McKelvey, an economist at Goldman Sachs, wrote in a note last week.

Those who benefit from the downturn could be those still willing to take a trip to the mall, where they will find deep discounts on a range of products. First-time home buyers may also find deals, as long as they can obtain a mortgage — no easy task in a time of tight credit.

Many economists pointed to government stimulus as the way out of the economic mess, and they applauded the federal government’s announcement that it might try to drive down interest rates on mortgages to 4.5 percent, about one percentage point lower than current rates.

A major stimulus package is also expected to be announced in January or February, soon after Mr. Obama takes office. Economists hope the package will create jobs and stimulate spending, and many predict that economic growth will improve slightly after this quarter with the federal help.

In an address taped for broadcast Saturday morning on radio and YouTube, Mr. Obama committed to the largest public works program since the creation of the interstate highway system a half century ago. “We need action — and action now,” he said.

Still, analysts said that government assistance would probably not result in a full recovery by May, which would signify the 16-month point of the recession. That would match the record for the longest postwar recession, set in 1975 and reached again in 1982.

“Up until mid-September, a plausible scenario was that it would be a short and shallow recession,” said Edward Yardeni, the investment strategist. “After mid-September, it became quite obvious that that was wishful thinking.”