Some economists worry about deeper downturn

"We can't afford to stagger from one day to the next without knowing what large financial institution might be the next to go down the tubes because of a lack of liquidity. That is way too dangerous a game," said Lyle Gramley, a former Fed board member who is now an economist with the Stanford Financial Group. "It is possible that we could be entering the worst recession of the post World War II period. The threat is certainly there."

Because of Bear Stearns, many analysts are raising the odds that a 2008 recession could be worse than expected.

"The potential freezing up of the financial system could have pretty negative ramifications on bank lending which would have negative ramifications on consumer and business spending," said Nariman Behravesh, chief economist at Global Insight, a Lexington, Mass., forecasting firm. He said he had upped the chances of a worse-than-expected recession to 40 percent, up from 25 percent odds before Bear Stearns.

David Wyss, chief economist at Standard & Poor's in New York, said he now has a worst-case-scenario in which the country could endure a double-dip recession in which the economy would briefly recover this summer, helped by the $168 billion in tax relief, only to quickly slip back into a downturn. Under this scenario, the economy's total output, as measured by the gross domestic product, would drop by 2.2 percentage points, making it the third worst recession in the post World War II period.

The worst recession in recent decades, in terms of lost output, occurred in the 1973-75 period of oil shocks, when GDP fell by 3.1 percent, followed by the 1981-82 recession, when GDP dropped by 2.9 percent.

By contrast, in the last two recessions output fell by 1.3 percent in the 1990-91 downturn, and a tiny 0.3 percent in the 2001 recession, making that slump the mildest in the post-war period in terms of lost output. The 2001 downturn lasted just eight months.

Wyss' baseline forecast calls for the 2008 downturn to trim GDP by just 0.5 percent and last for nine months, from last November until August.

Under that forecast, unemployment, which hit a low in this expansion of 4.4 percent and now stands at 4.8 percent, will rise to around 6 percent, meaning 1.5 million people will lose their jobs. Under the worst-case forecast, unemployment jumps to 7.5 percent, meaning 3 million people would be tossed out of work.

"There would be bigger drops in the stock market and in home prices than we are now anticipating and more people out of work," Wyss said. "There would be a lot of pain all the way around."

While they are developing worst-case-scenarios, Wyss and other economists said they still believe the balance has not tipped from their more benign main forecasts. One thing that gives them hope is the expectation that Congress and the Bush administration, having acted so quickly to pass the first stimulus package, will move quickly, especially in an election year, to pass a second package if needed.

Also, analysts said the Bear Stearns crisis, which has already prompted the Fed to move more aggressively, will also probably trigger a bigger response on the part of Congress and the administration in offering help to homeowners to keep them from losing their homes because of mortgage defaults.

"Historically, when policymakers have acted in a concerted and aggressive way, that signals that we are nearing the end of the crisis," said Zandi. "If that occurs this time and the financial markets stabilize in the next few months, then the economy will suffer but it won't be a prolonged and severe recession."

Don't miss this on MSNBC.com Tiny carp nibble your toes in fishy pedicure When the Dumpster is also the pantry Tune in to the joy of TV's guilty pleasures Is the truth out there? Real-life 'X-Files' Coming to America — for a great currency rate

MORE FROM STOCKS & ECONOMY

Stocks & economy Section Front

Surprising jump in June durable goods orders   Stocks boosted by upbeat reports Consumer confidence rebounds from 28-year low House proposal to tap strategic oil reserves fails Existing home sales tumble 2.6 percent New York sues UBS, alleges auction-rate fraud Jobless claims surge as companies retrench Dow Chemical profit sinks 27 percent Southwest profit rises on fuel savings Boom in oil, corn prices seems to be ebbing Stocks & economy Section Front   Add Stocks & economy headlines to your news reader: