Economist Sees Even Chance Of A US Depression

Source : The Business Times, December 22, 2008

(WASHINGTON) The US economy has a 50 per cent chance of falling into a depression over the next three years, said Roger Farmer, a member of the National Bureau of Economic Research's economic fluctuations and growth programme.

'There's a significant probability that things will get worse,' Dr Farmer, 53, said during a phone interview last week. 'We're certainly not at the end of the recession and things are getting worse.'

A drop in the Conference Board's index of leading indicators, released last Friday, underscores economists' expectations that the recession would be the longest in the post-war era as banks restrict credit, home and stock values plunge, and job losses mount.

Dr Farmer, who is also graduate vice-chair of the economics department of the University of California at Los Angeles, is predicting that the US recession would last at least another year. 'Everything depends on business confidence, and what I see is declining confidence.'

The loss of confidence is leading households and companies to undervalue assets, which in turn is hurting consumer spending and investment, he said. A government fiscal stimulus programme will have a 'questionable' immediate effect on consumption and financial markets, Dr Farmer said. Instead, he supports the idea of letting the Federal Reserve or government step into the stock market by buying indexed securities such as those linked to the Standard & Poor's 500 Index.

'I don't think anything from historic episodes suggests that, left to itself, the economy is going to magically recover and come back to full employment,' he said. 'Certainly, economies can occasionally stagnate and we should be concerned that that could potentially happen again.'

Employers cut 533,000 jobs from payrolls in November for a total loss so far this year of 1.9 million, which more than erases last year's gain of 1.1 million. The unemployment rate, now at 6.7 per cent, may go above 10 per cent and 'potentially stay there for a while', Dr Farmer said.

The NBER's economic fluctuations and growth programme focuses on the US economy. The programme includes the Business Dating Committee, which officially marks the beginning and end of recessions and expansions. -- Bloomberg