Economic downturn may be picking up speed

As businesses saw their credit dry up in September, the Fed stepped in to guarantee the so-called commercial paper that big companies rely on to manage their day-to-day cash flow.  More recently, consumers are seeing the crunch spread to credit cards, which has begun to put a crimp on their spending. Thursday’s GDP report showed that consumer spending — which accounts for about 70 percent of all U.S. economic activity — fell 3.1 percent in the quarter ending Sept. 30, the biggest drop since 1980.

One big reason is that consumers have less money to spend. Job losses and plunging home equity have eaten into purchasing power. Investors have lost an estimated $2 trillion in retirement savings alone since the stock market embarked on a sickening plunge last month. Rising home equity and an expanding stock market were two of the key factors that fueled the economic expansion that began in late 2001.

The reversal of those factors will make it difficult to get the economy back on track. Efforts to rescue the banking system have focused on building up capital and writing down bad debts. Now American households are embarked on the same painful process by tightening their belts, putting further pressure on consumer spending.  It remains to be seen how long that process will take.

“This is going to be a long, protracted retrenchment,” said former Fed Gov. Lawrence Lindsey. “The key is going to be (that) consumers have no choice but to cut back. They can't get the credit that they've used to fund themselves. And so, over two years, I think we're going to see a significant retrenchment in consumer behavior.”

Consumers are also likely to cut back as long as they’re worried about losing their jobs. The unemployment rate already has risen to 6.1 percent from 4.7 percent a year ago, and it is likely to rise further. The jobless rate last peaked at 6.3 percent in 2003, hit 7.8 percent in the 1991-92 recession, and rose to 10.8 percent in 1982.

The economy already has shed at least 760,000 jobs this year; numbers for October will be reported Nov. 7. Other recent recessions eliminated anywhere from 1.6 million to 2.8 million jobs.

Just this week American Express announced plans to eliminate 7,000 jobs and Motorola said it would eliminate 3,000.

There are a few bright spots in outlook. The plunge in oil prices has taken some of the pressure off consumers at the gas pumps. The drop in housing prices continues, but the pace of the decline seems to be slowing, and falling prices appear to be drawing some interest from buyers.

There is little consensus among economic forecasters as to how long this recession will last. A lot depends on how long it takes for home prices to stabilize; news that the government is at work on a comprehensive plan to help reverse the rise in foreclosures could go a long way to helping the housing market find a bottom.

Recent recessions have lasted from eight to 16 months, although there was a period of back-to-back recessions that lasted nearly three years in the early 1980s.

“I think that we are almost a year into this recession,” said Robert Barbera, chief economist at ITG. “So, you could have it ending in the middle of next year and it would be a record length recession."

Also in msnbc.com business ConsumerMan: The great rebate debate Retailers learn lessons from Black Friday death Your Career: How your name may hurt you Answer Desk: Unemployment benefit madness   Video: Stores are hoping for a holiday miracle

MORE FROM EYE ON THE ECONOMY

Eye on the Economy Section Front

'Problem' banks at highest level in 16 years RV industry no longer running on empty Long-term unemployed face dwindling options  Obama warns of 'double-dip recession' One in four metro areas in recovery mode Geithner warns lack of loans may slow recovery Of bats and billions: Following stimulus funds As stimulus funds trickle down, debate heats up Commercial real estate bust looms NYT: Ex-homeowners forced into shelters Eye on the Economy Section Front   Add Eye on the Economy headlines to your news reader: