Forecasters share predictions for economy's outlook in 2009

It may come as a surprise, given all the bad news of late, but the U.S. economy is expected to emerge from the recession sometime around mid-2009.

Until that happens, the economy will remain mired in one of the deepest and longest downturns the nation has seen in decades.

If the recession continues past the spring, as many economists predict, it will be the most prolonged one since the Great Depression. Employers are expected to continue to shed jobs at a rapid pace. Consumers will pull back spending. Businesses will cancel equipment purchases. Unsold, empty homes will dot city blocks.

However, once the massive amount of fiscal stimulus currently being crafted by lawmakers and aggressive action by the Federal Reserve kicks in, the economy is expected to improve, according to several economists and business owners.

"We all just need to hang on," says Allen Sinai, president of Decision Economics, an economic consulting firm. "By late in the year, the economy will be moving up, and 2010 should be a recovery year."

OLE managing partner Javier Escobedo is counting on that.

Business at his New York-based advertising company with a focus on the Hispanic retail market has dropped significantly since Thanksgiving. In the past few months Escobedo has not renewed contracts for about 20 people he employed on a project basis.

He's looking for things to pick up in the third quarter. But "the highflying numbers in terms of revenues in my business" won't likely come for two to three years, he says.

Unknown is how rapidly the economy will rebound once the turnaround takes hold. Some say it could come roaring back.

"We're going to throw so much at it in terms of fiscal and monetary stimulus that we will turn it around, and it will have legs," Comerica Bank chief economist Dana Johnson says.

Others are gloomier. They expect continued job losses and depressed consumer and business spending throughout the year because of tight credit conditions. The resulting damage to the consumer and business psyche will change the very nature of the economy for years to come.

"The first six months of '09 will be very painful, the second six months will just be painful, and 2010 will be uncomfortable," Moody's chief economist Mark Zandi says.

Predicting the economy's future is particularly tough this year, given rapid changes in the economy and financial markets, and uncertainty about what course of action Congress and President-elect Barack Obama's administration will take to boost the economy in the new year, says Conrad DeQuadros, senior economist at consulting firm RDQ Economics.

"When it comes to all of these forecasts, there is a lot less clarity than usual," he says.

A look at five key areas of the economy to watch in 2009

1. Jobs

The outlook for jobs is probably the worst aspect of the economy in 2009. Employers are expected to trim payrolls until the end of the year, shoving the jobless rate above 8%, according to forecasts from Barclays Capital, John Hancock Financial Services, Citigroup, Mission Residential, Wachovia and National City.

That excludes those who have given up on finding jobs or who work part time because they can't get full-time work. The jobless rate was 6.7% in November, the highest in 15 years.

Job losses could be particularly brutal in the first half of the year. Last month, 60% of U.S. CEOs said they expected to cut workers in the next six months, according to the Business Roundtable. A number of companies, including Bank of America and United Airlines, have already announced layoffs for early 2009.

Even after the economy stabilizes, job losses will probably continue for a while. That's common in recovery periods as wary businesses await more evidence that the economy is on solid footing. Employers cut jobs for nearly a year after the 2001 recession ended, for example.

"I don't know what is coming, so what we are trying to do is remain nimble and lean," says Andrew Field, CEO of Livingston, Mont.-based He employs 162 people full time, down from nearly 200 early in 2008.

Bright spots: The health care and education sectors will keep adding jobs.

2. Housing

The long-depressed housing market is widely expected to hit a bottom in 2009. But the rebound will likely be very slow and gradual, given rising unemployment and a sluggish economy.

"Housing will, to a certain extent, lead in this recovery," Wachovia Securities senior economist Mark Vitner says.

But initially, that won't be because the market is actually strengthening, as has been the case in previous post-recessionary periods, he says. "What gives us positive numbers in the second half of 2009 … is that housing stops falling," Vitner says

Housing construction, which has fallen off a cliff since peaking in early 2006, will flatten in mid-2009, he says. Wachovia anticipates the decline in sales of new and previously owned homes will bottom out around the same time.

While sales and construction are expected to flatten or edge higher, it's more murky as to when prices will stop falling.

The timing of the price recovery depends, in part, on how strongly state and federal governments step in to stop foreclosures, Vitner and other economists say. Wells Fargo senior economist Scott Anderson argues prices won't rebound until 2010 because home sellers will keep cutting prices to compete with banks selling foreclosed homes.

3. Consumer spending

Consumer confidence has taken an enormous hit in recent months, and Americans are expected to be tight with money early in the year, then slowly increase their spending.

The massive loss of wealth from the decline in stock and home prices has taken a huge toll on U.S. households. Net worth was down more than 11% in the July-September quarter from a year earlier, according to the Federal Reserve. When people are less wealthy — even on paper — they tend to spend less. And Americans finally are building up their savings — after years of spending more than they earned.

"When unemployment is high and confidence is low, people accumulate a little bit of a nest egg," National City chief economist Richard DeKaser says.

Retailers are bracing for the worst, with the most optimistic suggesting that the downward slide in sales will stop or at least slow in the second half of the year. But they're not taking any chances. Nearly all chain stores have scaled back plans to open stores. Some, including Sears and Ann Taylor, are expected to close stores well into next year and beyond. The liquidation company Hilco Appraisal Services recently predicted that 14,000 retail stores of all sizes will close in 2009.

Auto sales in the USA are expected to be even worse in 2009 than in 2008, reflecting the lower sales volume that hit at the tail end of this year. Estimates range from 11.5 million to 12.5 million for 2009, a far cry from the 17 million-a-year sales level in 2001, the Detroit 3 automakers said in testimony this month as they sought a federal bailout.

Consumer spending accounts for over two-thirds of U.S. economic activity. DeKaser and analysts at Barclays Capital, UCLA and John Hancock all expect spending to increase in the April-June quarter. One thing that will help is the sharp drop in prices of commodities, particularly gas. "It's one of the good pieces of news that's out there," says IHS Global Insight chief economist Nariman Behravesh.

4. Business spending

Businesses are expected to cut spending dramatically through much of 2009. A number of economists, including those at Citi, UCLA, National City and Wachovia, don't expect business investment, which accounts for about one-tenth of U.S. economic activity, to decline through 2009.

According to a survey of 679 chief financial officers by Duke University and CFO Magazine this month, U.S. businesses expect to cut capital spending by more than 10% in the next 12 months, a sharp deterioration from September, when the CFOs expected business investment to increase slightly.

John Graham, finance professor at Duke and director of the survey, says businesses are finding ways to repair existing machinery and buildings rather than replace equipment or move. They likely won't increase their spending until they see concrete evidence the economy is on the mend.

"Some people are doing it because the business is just not there," Graham says. "Other companies are potentially cutting back even as a precautionary measure."

Also holding back businesses is the lack of access or high cost of credit, Graham says.

Robert Safro, president of LOGOmotion, a Bethesda, Md.-based company that creates marketing materials such as coffee mugs and tote bags for conferences and businesses, sees a great deal of caution from his clients.

Those planning meetings for late winter and early spring are either buying fewer or less-expensive items, or they're not buying at all. One client who usually spends about $80,000 on a conference each year is spending half that.

"I'm concerned," Safro says.

Robert Coen, director of forecasting at media-analysis firm Magna, predicts a 4.5% drop in ad spending to $259 billion in 2009 on the heels of a 3.2% drop in 2008.

"A recovery in U.S. ad budgets will probably not get underway until 2010," he says.

Another negative for 2009: There aren't any big ad-spending events such as the Olympics or national elections.

Declining business spending will hurt a number of industries but will be especially tough for the manufacturing sector. Nearly two-thirds of manufacturers expect revenue to be unchanged or lower in 2009 than 2008, a survey from the Institute for Supply Management found.

5. Prices

Concerns about inflation are so 2008. In 2009, deflation worries are expected to dominate the pricing landscape.

With the economy in a slump, prices are falling for a variety of goods — prompting worries that the economy could sink into a deflationary spiral. Deflation is a broad, sustained decline in prices that is hard to stop once it takes hold.

If consumers expect prices to decline, they put off making purchases, thus crippling the already weak economy.

While many economists say the chances of deflation are remote, the Federal Reserve is taking no chances.

Tuesday, the Fed slashed interest rates to near zero and vowed to keep them low while also pledging to plow money into the financial system to unlock lending and boost the economy.

Concerns about deflation will make the Fed "all the more aggressive," says Comerica's Johnson, arguing that although price pressures are abating, the chance of outright deflation is remote.

Still, "That is going to be a risk for a while given the severity of the recession."

Contributing: Jayne O'Donnell and Stephanie Armour in McLean, Va., Sharon Silke Carty in Detroit and Laura Petrecca in New York