Economists: U.S. is in recession and it will get worse

ANN ARBOR (AP) - The U.S. economy is in a recession that will worsen until mid-2009, University of Michigan economists said late Thursday in their annual national economic forecast.

They expect the recession to bottom out in the middle part of next year, but say the country will see only modest economic growth in 2010 with unemployment above 8 percent throughout that year.

They expect the nation to lose about 2.4 million jobs over the next 18 months. The forecast came amid reports that new claims for unemployment benefits jumped last week to a 16-year high, to a seasonally adjusted 542,000. More than 1.2 million jobs have been lost so far this year.

Economist Joan Crary at the university's Research Seminar in Quantitative Economics characterized the recession as ''moderately severe,'' but said she expects a stimulus package likely to be put in place early next year will keep it from becoming worse.

''We're not forecasting economic catastrophe,'' Crary said. ''We expect the set of policies put in place will be successful.'' Among the policies she expects to see are stimulus checks for taxpayers to spur spending, more money for infrastructure improvements and state and local governments, and loans for domestic automakers.

The Senate on Thursday sent legislation to President George W. Bush extending unemployment benefits by seven to 13 additional weeks for people who have exhausted their benefits after 26 weeks. Bush is expected to quickly sign it.

Crary warned that if steps aren't taken to spur the economy, the recession will be worse. Congress was unable Thursday to reach a deal that would give distressed domestic automakers a bridge loan, but could return in December to tackle the issue again.

The RSQE forecast said sales of light motor vehicles will continue to slide, from 16.1 million last year to 13.3 million this year and around 12.2 million in 2009, which would be the fewest sold since 1983. Crary expects sales to pick up to 13.6 million in 2010.

She expects to see a reduction in market share for the domestic automakers but said the forecast isn't built on the demise of any of them. The university on Friday will release its economic forecast for the state of Michigan, where the Detroit Three are headquartered.

Richard Curtin, director of the University of Michigan's index of consumer sentiment, said he's seeing a record decline in consumer confidence because of falling wealth. Because of the recession, people are reducing debt and pushing up savings, slowing economic growth even more.

He expects a national recession to last until the third quarter of 2009, and said the eventual recovery will offer little in the way of new jobs. People are so nervous about their retirement savings, their jobs and their income levels that 45 percent say the don't think now is the time to make discretionary purchases.

''This indicates consumers are ready to change even their most intrinsic purchases,'' Curtin said. He expects consumer confidence, already at lows not seen since the Great Depression, to tick up slightly just before Barack Obama is sworn in as president, but doesn't know if the optimism will last. William Dunkelberg, chief economist for the National Federation of Independent Business, said during Thursday's seminar that business owners are likely to hold back on spending as well.

''Expectations for growth are not good, and that's going to translate'' into fewer hirings and capital expenditures, he said. Businesses ''are postponing everything.''

The RSQE forecast said inflation is expected to drop from 4.2 percent this year to 1.3 percent next year before rising again to 2.6 percent in 2010. Falling oil prices will be responsible for some of that drop, with the forecast calling for prices to stabilize at under $60 a barrel in 2009.

It expects housing prices will fall 14 percent this year and 6 percent next year, with new housing starts dropping to a low of 836,000 next year. There should be some improvement in 2010, but not to this year's level of 965,000 units, Crary said.

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On the Net:

U-M Research Seminar in Quantitative Economics: www.umich.edu/(tilde)rsqe

AP-CS-11-20-08 1740EST