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Economic woes expected to worsen early this year

Jack Chang | McClatchy Newspapers • Published January 05, 2009

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WASHINGTON — The economy will get worse before it gets better this year as housing prices continue to fall, unemployment rates rise and the gross domestic product contracts.

That's what economists across the political spectrum are forecasting as Americans start the new year amid the worst economic crisis in at least two decades.

The only question left is what, if anything, a stimulus package promised by President-elect Barack Obama will accomplish. He's pledged upward of $800 billion in public works projects, aid to state and local governments and middle-class tax cuts.

"The whole question is whether can we stop the bleeding in 2009," said Robert E. Scott, senior international economist at the Economic Policy Institute, a nonprofit research center focused on economic issues that affect low- and middle-income people.

"It'll be a down year, and the question is whether that will bleed into 2010," Scott said.

For the average U.S. household wondering how to survive the turmoil, the economic choir sang in unison: Don't take on debt, don't make risky stock investments and play it safe — at least until next year.

Many are predicting that the country's 6.7 percent unemployment rate could reach as high as 10 percent this year and that housing prices have fallen by only about 60 percent of their eventual decline.

Economists also estimate that the U.S. economy contracted by an annual rate of 5 percent in the last quarter of 2008 and could shrink by the same amount this quarter. Official growth numbers for the last quarter of 2008 will be released next week.

The grim news continued Friday, with the trade group the Institute for Supply Management finding that U.S. manufacturing activity fell last month to its lowest level in nearly three decades. Global manufacturing also dropped, according to other measures.

"I doubt there'll be any significant (economic) growth in any quarter," said Barry Bosworth, an economist at the Brookings Institution, a Washington research center. "The unemployment increase will be shocking to most people; 2009 will just be really bad, and it'll be global."