The economy is spiraling down at an accelerating pace, threatening to undermine the Obama administration’s spending plans, which anticipate vigorous rates of growth in years to come.
A sense of disconnect between the projections by the White House and the grim realities of everyday American life was enhanced on Friday, as the Commerce Department gave a harsher assessment for the last three months of 2008. In place of an initial estimate that the economy contracted at an annualized rate of 3.8 percent — already abysmal — the government said that the pace of decline was actually 6.2 percent, making it the worst quarter since 1982.
The fortunes of the American economy have grown so alarming and the pace of the decline so swift that economists are now straining to describe where events are headed, dusting off a word that has not been invoked since the 1940s: depression.
Economists are not making comparisons with the Great Depression of the 1930s, when the unemployment rate reached 25 percent. Current conditions are not even as poor as during the twin recessions of the 1980s, when unemployment exceeded 10 percent, though many experts assert this downturn is on track to be significantly worse.
Rather, economists are using the word depression — a subjective term with no academic definition — to describe a condition of broad and extreme economic distress that remains stubbornly in place for much longer than a typical downturn.
This is more than a matter of semantics. As the government determines its spending plans, readying another infusion of cash for troubled banks while contemplating an additional bailout for the auto industry, the magnitude of those needs will hinge on the extent of the damage.
Mark Zandi, chief economist of Moody’s Economy.com, now places the odds of “a mild depression” at 25 percent, up from 15 percent three months ago. In that view, the unemployment rate would reach 10.5 percent by the end of 2011 — up from 7.6 percent at the end of January — average home prices would fall 20 percent on top of the 27 percent they have plunged already, and losses in the financial system would more than triple, to $3.7 trillion.
Allen Sinai, chief global economist at the research firm Decision Economics, sees a 20 percent chance of “a depressionlike possibility,” up from 15 percent a week ago.
“In the housing market, the financial system and the stock market, we’re already there,” Mr. Sinai said. “It is a depression.”
Yet, in drawing up the budget, the White House assumed the economy would expand by a robust 3.2 percent in 2010, with growth accelerating to 4 percent over the next three years.
“It’s a hope, a wing and a prayer,” Mr. Sinai said. “It’s a return to a sanguine view of the economy that is simply not justified.”
Full story: http://www.nytimes.com/2009/02/28/business/economy/