Obama inherits worst recession since Reagan

THE MELTDOWN EFFECT

President-elect Barack Obama will inherit the worst recession since Ronald Reagan’s second year in the White House, economists said as figures showed US payrolls plunged by more than half a million the past two months.

The economy will shrink at a 3.5 per cent annual rate in the fourth quarter and at a 2 per cent pace in the first quarter of 2009, nearly twice prior estimates, Goldman Sachs Group Inc economists led by Jan Hatzius wrote in a note on Friday. That would be the biggest back-to-back contraction since 1982.

The surge in unemployment reflected an economic cave-in in October, when car sales plunged 32 per cent, manufacturing contracted the most in 26 years and consumer confidence fell to a record low. The deepening recession puts pressure on Obama to quickly assemble a response and name his economic team.

The “unemployment report is a pretty powerful piece of evidence that the economy is still weakening,” Hatzius said in a telephone interview. “We think a sizeable fiscal stimulus program is appropriate at the current juncture.”

Congressional Democrats are preparing a pre-inaugural fiscal stimulus bill and calls are also mounting for more Federal Reserve rate cuts.

The jobless rate in October rose to 6.5 per cent and companies slashed 240,000 jobs, for a total of 1.2 million losses so far this year, the Labor Department said. The 1.5 percentage point gain in unemployment over the prior six months was the fastest since the six months ending in February 1982.

President-elect Obama, in his first press conference since the Nov. 4 election, said yesterday any stimulus package would combat unemployment.

U.S. in a ‘Hole’

“It is not going to be easy for us to dig ourselves out of the hole that we are in,” Obama said yesterday in Chicago. “We are going to have to focus on jobs because the haemorrhaging of jobs has an impact on consumer confidence and the ability of people to purchase goods and services.”

The head of the official arbiter for U.S. economic cycles yesterday said there’s no doubt that the economy is in a recession.

“The evidence is more than compelling,” Robert Hall, who heads the National Bureau of Economic Research’s panel, said in an interview following the jobs report. “It’s conclusive, in my personal opinion.”

Hall joined fellow panelist and Harvard University Professor Martin Feldstein in calling a recession. The eight-member group will meet at a later date to make an official determination because it needs additional details on gross domestic product figures, Hall said.

Economic Slump

Feldstein and other analysts have said the economic slump is likely to be deeper than the past two recessions, in 2001 and 1990-91. Other economists are also lowering their forecasts.

“We’re in for a rough patch and it’s going to last probably for a little longer than we’re used to,” Drew Matus, senior U.S. economist at Merrill Lynch & Co. Inc. in New York, said in an interview with Bloomberg Television. “We haven’t really seen the impact on the consumer yet from the job losses we’ve just reported.”

Goldman’s call reflects mounting concern that growing numbers of companies and consumers will lose access to credit as the worst financial crisis in seven decades prompts banks to rein in lending.

The Fed will cut its target interest rate by half a point to 0.5 percent by year-end, while Obama and Congress work out a stimulus package of between $300 billion and $500 billion, Goldman economists predicted.

Goldman analysts said Fed policy makers may opt to cut the rate before their next meeting on Dec. 16.

Goldman’s GDP contraction calls would mark the steepest recession since the economy shrank 4.9 percent in the fourth quarter of 1981 and 6.4 percent in the first quarter of 1982 after Fed chairman Paul Volcker drove the overnight interbank rate to as high as 20 percent to stem inflation.

To contact the reporter on this story: Bob Willis in at bwillis@bloomberg.net 
 To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net