Reuters Poll: U.S. Economy Faces Recession, Probably in Q1

By Brian Frierson | March 12, 2008

The U.S. economy has ground to a halt and probably already is in recession but faces higher inflation this year than thought just a month ago, a Reuters poll showed on Wednesday.

A dismal run of economic data including two months of job market contraction, a declining factory sector and shrinkage in the dominant service sector, has led analysts to downgrade the already grim economic assessment they gave a month ago.

Economists made their forecasts before the Federal Reserve and other central banks teamed up on Tuesday to get hundreds of billions of dollars in fresh funds to cash-starved credit markets, allowing financial firms to use securities backed by home mortgages as collateral for central bank loans.

The latest poll, taken March 7-12, also reaffirmed the disturbing trend set in motion last year of higher median inflation expectations for 2008 even as growth forecasts take another hit.

Economists dropped growth expectations to none at all for the first three months of this year from the anaemic 0.2 percent they forecast last mnnth.

The poll also showed a median 60 percent chance of an outright recession, which likely started in the current quarter if not late last year. That was up sharply from 45 percent last month and in January.

“The evidence has built to the point that it is now beyond a reasonable doubt that the U.S. economy has entered recession,” said Scott Anderson, a senior economist at Wells Fargo & Co. in Minneapolis.

A report on Friday that showed the U.S. economy shed 63,000 jobs in February, the biggest drop in non-farm payrolls since July 2003, was a key bit of evidence to back that conviction. It was the second consecutive month that payrolls fell, which also hasn’t happened since mid-2003.

Recession is traditionally defined as two consecutive quarters of declining gross domestic product, though some analysts define it more generally.

To cushion the economy’s fall, analysts expected the Fed to continue its aggressive campaign of monetary easing by taking its benchmark federal funds rate down to 2.5 percent later in the first quarter from 3.0 percent now.

Economists expect the funds rate to hit bottom at 2.0 percent in the second quarter. That was half a percentage point lower than the trough last month’s survey predicted the fed funds rate would reach in the first quarter.

However, with the economy reeling amid the worst housing slump since the Great Depression and resulting financial market turmoil, some analysts say monetary policy may not be enough.

“Rate cuts alone may not suffice,” said John Lonski, chief economist at Moody’s in New York.

The poll showed analysts expected the Fed to start raising interest rates gradually next year, taking them back up to 2.5 percent in the second quarter and 3.0 percent in the third. By then, the economy should be back from the sick bed.

Though gross domestic product will only rise 1.4 percent for all of 2008, the poll found it will likely expand by 2.5 percent in 2009. That compares to the Fed’s own forecasts, given in a range, of 1.3-2.0 percent this year and 2.1-2.7 percent in 2009.

Economists see the core consumer price index, which excludes food and energy prices, rising by an average of 2.5 percent in the first two quarters this year.

The persistence of strong inflation will bolster concerns of some that the U.S. could tip into a period of stagflation — marked by a sluggish economy and robust price growth — though that threat is still a distant one at this point.

Economists expect core inflation to dip to an average of 2.4 percent in the third and 2.3 percent in the fourth quarter and then decline to 2.2 percent in 2009 as a whole. For 2008, headline inflation will be 3.5 percent, dropping to 2.3 percent in 2009, the poll showed.

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