Unemployment Rate Will Peak at 7.5%: NABE

The U.S. economy is in recession and will contract at a faster pace in the fourth quarter, extending the decline into early 2009 as high unemployment crimps consumer spending, a survey showed.

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The National Association of Business Economists' poll of 50 professional forecasters released Monday found that real gross domestic product was expected to fall 2.6 percent in the fourth quarter and slump 1.3 percent in the first three months of 2009.

Preliminary government estimates showed GDP contracted 0.3 percent in the third quarter. The results of the survey, which was conducted between Oct. 28 and Nov. 7 indicated growing pessimism among forecasters.

"Business economists became decidedly more negative on the economic outlook for the next several quarters as a result of the intensification of credit market stresses and evidence of
spillover to the real economy," said NABE President Chris Varvares.

"Credit conditions continue to be tenuous. Despite the hefty liquidity injections by the Fed and the Treasury, the majority of NABE panelists believe that tight credit conditions will continue."

A month ago, forecasters expected the economy to expand 0.1 percent in the fourth quarter, with the growth pace accelerating to 1.3 percent in the first quarter of 2009.

Troubles in the U.S. housing sector, emanating from the extension of loans to homeowners with poor credit history, have engulfed the broader economy, resulting in rising job losses and tight access to credit.

Economy in Recession

About 96 percent of the NABE forecasters believed that the world's economic power house was already in recession. Half of them estimated the downturn started in the fourth quarter of
2007 or in the first quarter of 2008.

More than a third reckoned the recession began in the third quarter of 2008, and nearly three-quarters believed it could persist beyond the first quarter of 2009. Over 60 percent expected the depth of the recession to be contained, with the decline in GDP bottoming below 1.5 percent.

Overall GDP growth in 2008 was expected to come in at around 0.2 percent and top 0.7 percent next year, according to the survey. This compares with predictions of 1.2 percent and 2.2 percent respectively in October's survey.

"With the recession continuing into 2009, GDP growth next year is expected to be a meager 0.7 percent. This would be the slowest growth over a two-year period since the early 1980s," said Varvares, who is also the president of Macroeconomic Advisers.

Despite the gloomy economic outlook, the Federal Reserve would probably keep its benchmark overnight lending rate steady at 1 percent, raising it by 25 basis points in the last quarter of 2009, according to the survey.

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The unemployment rate was likely to peak at 7.5 percent by the third quarter of 2009, according to the survey. In the October poll, the jobless rate was seen topping out at 6.4 in the second quarter of next year.

The unemployment rate rose to a 14-year peak of 6.5 percent in October. With the unemployment situation expected to deteriorate, consumer spending, which accounts for about
two-thirds of economic activity, would remain depressed.

With household spending weak, auto sales forecasts were slashed to 13.4 million units this year from October's estimate of 14.0 million. Sales for 2009 were likely to fall to 12.5 million instead of rising to 14.2 million, as had been predicted in the October survey.

On an optimistic note, analysts said the housing sales rout was likely to bottom out by mid-2009, but a lot of uncertainty remains as new home inventories run at 10-months' supply, the survey found. Inflationary pressures would be contained as the economic downturn caps demand for oil, it showed.

The Fed's preferred inflation measure, the core PCE index, was seen rising 1.8 percent over 2009, 0.2 percentage point lower than in the October survey.

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