Why the Recession Will Last Longer Than You Think

Thanks to Helicopter Ben, the Bear bailout, et al, the recession won’t become a depression, the Economist argues, but it will last longer than you think:

The hangover’s duration will depend on many things, from the strength of foreign economies to the degree to which American firms cut jobs and investment. But top of the list, given the recession’s origins in the property bust and the credit crunch, are the fate of the housing market and the resilience of consumer spending. On both counts, the odds are against catastrophe but on a lasting headache.

Why? Two reasons.

First, the housing market–the main engine of the economy–is awful and still getting worse. The Economist sees some signs of hope, but notes that, even if housing prices stop declining, they won’t rise again anytime soon (and the duration of previous housing downturns suggests that we’ll have at least another year or two of declining prices.

Second, consumer spending, which accounts for 70% of the economy, faces the quadruple whammy of falling house prices, a deteriorating labour market, tighter credit conditions, and still-rising inflation.

With the possible exception of inflation, none of these trends is likely to ease in the coming months, let alone reverse. Thus the IMF’s forecast that calls for a shrinking economy through 2008 and a crappy one in 2009:

In its latest World Economic Outlook, published on April 9th, the IMF slashed its forecasts for America’s economy both this year and next. It now expects GDP to shrink in every quarter of this year. By the fourth quarter the economy will be 0.7% smaller than a year before. (Only three months ago the fund expected a rise of 0.9%.) Nor does the IMF expect 2009 to be much better: GDP will grow, but at well below its trend rate.

See Also:
Housing Snapshot: Still Awful, Getting Worse
Consumer Spending Rocked By “Quadruple Whammy,” Won’t Get Better Soon

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