GDP Will Drop By More Than 7% In The Second Half

Bloomberg’s poll of economists shows that the experts think US GDP contracted 5.5% in the fourth quarter. A drop of that magnitude would be the greatest since 1982, a year when the recession took joblessness to 10%.

Analysts are now trying to forecast what will happen as the economy moves into the first quarter and first half of this year.

It would be hard to make a case that GDP will not fall faster in Q1 09 than it did in Q4 08. If the lay-offs announced by large companies are any indication, joblessness rose well above the 7.2% recorded in December. New housing starts are at historically low levels and home prices are still falling. There is no evidence that consumer spending is improving, As a matter of fact, now that the holidays are past and guilt and shame are no longer motivating people to shop for gifts, many have not seen the inside of a shopping center.

The drop in activity among shoppers will almost certainly cause record levels of store closings and hundreds of thousand of layoffs in the retail industry. Airlines say that traffic is dropping sharply. That means that they will have to chop more routes and more employees. Government workers are facing job cuts as cities and municipalities run large deficits. A restructuring of Detroit will cost people work whether the process is done in cooperation with the government or through bankruptcy.

Another critical pillar of the economy, capital spending, has likely been choked off as companies do what they can to preserve capital. Firms which build capital goods will not be able to maintain the levels of employment that they did last year.

All of this adds up to GDP contraction moving in the direction of 7% or perhaps more. According to The Wall Street Journal, in the second quarter of 1980, GDP fell at a 7.8% annual rate. A bit later, in the first quarter of 1982, it dropped 6.4%.

Most analysts now believe that 2009 will be the worst year for the economy since WWII. There are currently no significant indicators that would contradict this prediction. It is almost certain that GDP contraction in the current quarter will be worse than it was in the final quarter of last year. There will be a much greater contraction in the second quarter of the year since government assistance is unlikely to have any impact before the second half of 2009.

This year will be one from hell. The government and private enterprise are pinning their hopes on the new $825 billion economic stimulus package, the $350 billion left in TARP funding, and further action from the Fed to create liquidity. It is a motley last line of defenses, but it is all that the US has. 3-

Douglas A. McIntyre