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US Recession Seen Probable, but Shallow

The U.S. economy nearly stalled in the first three months of the year and will shrink between now and June, but any recession should be less severe than the last major downturn in the early 1990s, a Reuters poll showed on Wednesday.

Hundred Dollar
Bill Haber
Hundred Dollar

A prolonged housing slump, record high oil prices and three straight months of job losses have taken a toll on the world's biggest economy and many economists think it is already in recession.

In the latest poll of over 100 economists, taken April 15-23, participants said the United States probably managed to grow by 0.1 percent in the first three months of the year, just above expectations last month for no growth at all, but would likely shrink by 0.5 percent in the second quarter.

And as Wall Street continues to work through billions of dollars in losses on risky mortgage investments, the Federal Reserve will likely trim another half percentage point from its benchmark lending rate, taking it to 1.75 percent by June.

Economists have downgraded forecasts for 2008 U.S. growth in 9 out of Reuters last 10 monthly polls.

Asked if the United States was already in a recession, 42 of the 58 economists who answered said it was.

But while forecasts for the near term were gloomy, they brightened a bit when it came to the economy's ability to rebound in the second half of 2008 and beyond.

Growth is expected to turn positive again in the second half of 2008. For the year, the economy was seen expanding by 1 percent, below calls in March of 1.4 percent, though economists predicted a rebound to 2.1 in 2009.

If that holds true, the recession would be shorter and more shallow than one suffered in the early 1990s. Then, growth slowed sharply at the turn of the decade before grinding to a halt in the third quarter of 1990, according to the U.S. Bureau of Economic Analysis. It then declined by 5 percent over the next two quarters before rebounding by July 1991.

"From our perspective, only some of the data is behaving as if we're in a recession, and that's why people are hedging their bets and assuming a modest recession," said Michael Englund, chief economist at Action Economics in Boulder, Colorado.

Recent data showed the U.S. economy has shed jobs in each of the first three months of the year while the housing market remains mired in the worst slump since the Great Depression.

Sentiment readings have also been grim, with high oil and gas prices crimping consumers' confidence, but Englund said manufacturing and service sector data remain "well north of where they would be even at the start of a recession."

Inflation A Worry

Aggressive Fed rate cuts and unusually preemptive fiscal policy will likely prove to have cushioned the economy this time around, analysts said.

Julia Coronado, chief U.S. economist at Barclays Capital, said Congress' $168 billion stimulus package will "serve as a bridge" until later in the year, when Fed rate cuts and efforts to get fresh funds to cash-starved investment banks loosen lending conditions and help stabilize the mortgage market.

"Consumers will save most of their stimulus checks, but even if they spend one third, it will have a noticeable positive impact on consumer spending," she said.

Some economists still worry, though, that slower growth is not the main risk to economic health. The poll showed analysts expect the core consumer price index, which excludes food and energy, to average 2.4 percent in the current quarter, slipping to 2.3 percent by end-year and then to 2.1 percent by mid 2009.

Those median estimates were down slightly from levels predicted in March but continued to cause unease. And with oil prices hovering near $118 a barrel, some fear it's only a matter of time before those price rises seep into the broader economy.

The poll shows headline inflation, which includes food and energy, rising to 3.7 percent in the second quarter and at 3.5 percent for the year before easing to 2.3 percent in 2009.

"In our view, a big cause of slower consumer spending has not been the housing market but inflation, which has eroded consumers' purchasing power," Coronado said. "If we get further increases in headline inflation, forcing people to spend more dollars on gas and utilities, that's a risk to the economy."