Recession pain likely to linger

Many economists who hope for only a short downturn for economy worry weak recovery could hurt nearly as much as the slump.

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By Chris Isidore, senior writer

Did you reduce your holiday spending this year?
  • I was as generous as ever.
  • I was as miserly as Scrooge.
  • Somewhat
  • For everyone except the children.

NEW YORK ( -- As recessions go, the most recent downturns have been relatively short and painless. But the recovery was what hurt.

And if the United States truly is in or near a recession, it's quite possible that the lingering pain will be the problem once more.

"I don't know if it (the recovery) will be painful, but I know it won't feel all that great," said Keith Hembre, chief economist for First American Funds.

The risk of recession has become a major focus of economists and Wall Street this week, after Friday's weak jobs report saw unemployment jump to 5 percent and retailers reported the weakest holiday sales in years.

On Thursday, Federal Reserve Chairman Ben Bernanke pledged that the central bank is ready to slash interest rates again to prevent housing and credit problems from plunging the country into a recession. The Fed has cut its key lending rate three times since September, for a total reduction of 1 percentage point.

But a growing number of top economists believe recession is already here, or is at the very least likely.

Most of those using the R word are still projecting relatively narrow declines. They generally see the unemployment rate rising to around 5.5 to 6 percent during the downturn. Some believe that if consumers cut back on spending, it will be only a modest decline.

Many of those economists caution that even if they're right about a mild recession, the pain won't end once the economy starts to grow again.

Paul Kasriel, chief economist at Northern Trust in Chicago, said that even though he sees a short recession, to many Americans, it'll be a long time before they feel like the economy is truly doing well.

Even when growth picks up, that won't be the end of the pain, he said.

"I think the technical recession will be over in 2008, but the trajectory of the recovery in the second half or fourth quarter will be nothing to write home about," he said.

It's typical that unemployment and job losses continue to climb even after the recession formally comes to an end, as businesses respond to the downturn by cutting future spending plans.

In the most recent recession, the eight-month period in 2001, the unemployment rate was under 5 percent for the first six months of the economic slump.

But it climbed to 5.5 percent by November, the last month of the downturn, according to the National Bureau of Economic Research (NBER), the body that puts the official start and stop dates on a recession. Spending by individuals actually grew in five of the eight months of the recession.

The recession of late 1990 and early 1991 was just as short and nearly as shallow. It saw unemployment climb from 5.5 to 6.8 percent, still relatively modest by historic standards.

But the year and a half that followed the recession seemed just as bad or worse to many Americans, as unemployment rose to 7.8 percent by mid-1992. That allowed Bill Clinton to defeat a sitting president, George H.W. Bush, as his campaign leadership kept reminding themselves "It's the economy, stupid."

Kasriel said the comparison to the 1990-91 recession is a good one, as the economy struggled to recover from the savings and loan crisis that preceded it, just like the 2008 economy will try to adjust to problems in the credit and financial markets sparked by last summer's subprime meltdown.

"Back then, we didn't get much traction from Fed rate cuts until the end of 1993. The reason for that was we had a financial system that was crippled," he said. "I think that's the environment we're going to be in for a couple of years."

First American Funds' Hembre also believes that we could be in for a slow, weak, painful recovery from the current problems.

"There are some longer-term rebalancings that need to occur," he said. "We're running at a savings rate of zero today. That is going to have to move higher."

Some recession proponents believe there could be a quick recovery. They cite the fact that the Fed was cutting rates ahead of the recession's start, and that there is talk of a short-term economic stimulus package from Washington, perhaps in the form of tax cuts.

Goldman Sachs' senior U.S. economist Jan Hatzius said he's counting on another 1.75 percentage points of Fed rate cuts and some form of tax relief to keep the recession a relatively mild one.

"If the data are every bit as bad as we're expecting and the Fed for some reason refuses to respond, you could see a more severe recession," Hatzius said. "But right now the chance we do get some stimulus package is a little more than 50-50."

But there are other economists who believe that the problems facing the U.S. economy are far more serious than being estimated, and that the downturn could be very severe - and very long.

Perhaps the one seeing the worst time ahead is Peter Schiff, president of Euro Pacific Capital, a brokerage firm specializing in overseas investments, who believes not only is the economy already in a recession, but that it risks falling into a depression as severe as the 1930's.

"I think it will last for years," he said. "It's difficult to know if it'll be as bad or worse than the Great Depression."

Schiff said the real estate surge of recent years is the greatest speculative bubble in world history, with Americans borrowing trillions of dollars they can't repay.

"What we're going to go through now is a dramatic reduction in our standard of living," he said.

But Schiff's view is not widely accepted. Most economists, even those who now see an recession in place, are looking for some level of growth in 2008.

The Blue Chip Economic Indicator survey of 52 economists has a consensus estimate of 2.2 percent growth this year, less than what is considered trend growth, but far from a recession. Even Goldman's forecast for the year is GDP growth of 0.8 percent in 2008.

But even if Schiff is wrong and the overall economy rebounds later this year, it doesn't mean that there won't be more problems ahead.

"You're going to have this gradual slowdown in consumer spending ... business capital spending is not likely to be robust," said Northern Trust's Kasriel.

While state and local government spending will slow down as tax collections decline, Kasriel doesn't think any economic sector - other than housing - will collapse.

"But this is going to be sort of lingering death," he said. To top of page

The Fed to the rescue: Fed chairman says central bank ready to cut interest rates in order to support lagging economy.

Recession may already be here: Economists shift from wondering if there will be a recession to asking if downturn has already begun.

Weakest holiday sales in years: Many top retailers suffer big sales misses in December.
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