Economic downturn may be picking up speed

John W. Schoen Senior producer • Profile • E-mail

The latest economic data provide mounting evidence that the collapse of the housing market and turmoil in financial markets have tipped the U.S. economy into recession. The question now on the minds of consumers, business owners and politicians: How deep is it going to be, and how long is it going to last?

This week’s report showing a 0.3 percent decline in gross domestic product confirmed that the economy has shifted into reverse. With job losses rising, and consumer confidence falling to levels not seen in decades, the reversal appears to be picking up speed.

The latest bad news came Friday when the Commerce Department reported  that personal spending fell by 0.3 percent last month, the biggest decline in more than four years. That followed flat readings in both July and August, contributing to the worst quarterly performance in 28 years.

Although a recession is not official until a panel of economists determines when the economy peaked and began shrinking, many analysts believe a recession has been under way for months.

“We are now entering the harshest part of the recession,” Nigel Gault, chief U.S. economist for IHS Global Insight, wrote in a note to clients after the release of the GDP data.

One reason for concern is that the figures released this week do not reflect the October Panic that swept through the global financial markets as the credit system virtually shut down.

"The economy has deteriorated sharply since that time, particularly in October,” said Diane Swonk, chief economist at Mesirow Financial. “And now, even as credit markets begin to heal, we have to undo that damage, and that damage means that the economy's going to get worse before it gets better."

The Federal Reserve and Treasury have stepped up efforts to get banks lending again, and the Fed this week made another, largely symbolic, reduction in the interest rate target for short-term loans between banks. With that rate now at 1 percent, Fed Chairman Ben Bernanke and his colleagues are running out of ammunition to get money moving again through the financial system.

Congress is debating another economic stimulus package, including proposals to provide hundreds of billions of dollars for overdue upgrades to roads, water projects and sewer systems. That investment will help but probably will not be enough to offset growing gaps in dozens of state budgets. Those deficits will almost certainly being a cutback in state spending and hiring — one of the last sectors of the economy to show growth.

“There simply is no easy out for the financial markets, the economy or policymakers,” Wachovia chief economist John Silvia wrote in a note to clients. “The great American financial workout continues. “

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