U.S. confronts possibility of deep recession

By Adam Geller

updated 10:26 a.m. ET Oct. 16, 2008

NEW YORK - The U.S. has not endured a deep and prolonged recession in more than a quarter century — enough time for many Americans to forget what one feels like.

But unlike the last two relatively short recessions, this one could be much longer and more severe, potentially bringing with it anxiety and job losses not seen in many years.

"In thinking about recessions, people will naturally think back to the last couple" in the early 1990s and in 2001, said Paul Ashworth, senior U.S. economist at Capital Economics in Toronto. "What they should be looking back at is further."

That requires dredging up memories of the economic slides in the 1970s, when an Arab oil embargo starved the nation of energy, and the early 1980s, when unemployment and inflation soared.

The last recession — coinciding with the collapse of the tech stock bubble and the terrorist attacks of 2001 — lasted just eight months. It was known more for the slow "jobless" recovery that followed than for the depth of the downturn.

Many economists agree that the nation won't be so fortunate this time.

"I don't think we can escape damage to the real economy," former Federal Reserve Chairman Paul Volcker said this week in Singapore. "I think we almost inevitably face a considerable recession."

The Fed's current chairman, Ben Bernanke, delivered a more measured but similarly grave assessment in a speech Wednesday, saying that even if markets stabilize, "broader economic recovery will not happen right away."

Stock prices plunged, with major U.S. indexes down 8 to 9 percent on one of their worst days ever on concern about deteriorating economic conditions.

The signs of stress certainly are starting to show: The U.S. has lost 760,000 jobs since late last year, and retail sales in September plunged 1.2 percent, the largest drop in three years.

Every recession is driven by its own dynamic and psychology. The current slump started with the collapse in the housing market and got worse with sharp restrictions on credit that pressured consumer spending and businesses.

That is a different environment from 1973, when an oil crisis was the culprit, squeezing U.S. businesses and consumers. In the early 1980s, raging inflation and high interest rates took their toll.

Both periods saw millions of Americans out of work. In 1975, the unemployment rate peaked at 9 percent. In 1982, it jumped to 10.8 percent.

Most economists forecast a sharp increase in the number of people who lose their jobs. But they do not see it leading to unemployment on the scale of either the 1970s or 1980s.

Geithner: TARP extension sets stage for end   Treasury Secretary Timothy Geithner told a skeptical oversight panel that his decision to extend the unpopular bank bailout program sets the stage for eventually shutting it down. New jobless claims rise, trade gap narrows   Americans' net worth rises again Foreclosure activity falls for fourth month Obama outlines bailout for Main Street

The jobless rate is currently at 6.1 percent, and many economists expect it to rise to about 7 percent early next year — a level the country has not seen since 1993. Some analysts believe the unemployment rate could climb close to 8 percent, which hasn't happened since 1984.

But this recession could begin to feel like those of the past not just because of lost jobs, but because of fear about the future.

In the 1980s, as the nation struggled with inflation and a transition from a manufacturing economy to one based on services, Americans had "a huge amount of uncertainty and anxiety that lingered on for a long period of time," said Bart van Ark, chief economist for The Conference Board.

MORE FROM ECONOMY AT A CROSSROADS

Economy at a Crossroads Section Front

Geithner: TARP extension sets stage for end New jobless claims rise, trade gap narrows   Americans' net worth rises again Foreclosure activity falls for fourth month Obama outlines bailout for Main Street Bernanke: Too soon to tell if recovery will last theGrio: Black teens' unemployment rate spikes NYT: U.S. forecasts smaller loss from bank bailout Unexpected drop in jobless rate fuels optimism Obama sees some consensus at job summit Economy at a Crossroads Section Front   Add Economy at a Crossroads headlines to your news reader: