Some Recession Forecasts Go Out Five Years

CU360
March 23, 2009 | COMMENTS

Consumers and professional forecasters have little economic optimism as they confront the reality of a long and deep recession. The nation's economy will shrink 5.2% in the first quarter on an annualized basis--its worst performance since 1982, according to a quarterly forecasting survey published by the Federal Reserve Bank of Philadelphia.

Consumer confidence fell to its lowest level in three months in early February as sentiment grew increasingly gloomy over an economic downturn that most expect to last up to five years, according to the Reuters-University of Michigan consumer surveys.

“Confidence fell in early February as consumers came to the consensus that the economy would remain in recession throughout 2009,” the report said. “Nearly two-thirds anticipated that the downturn would last five more years.” The survey's index reading of confidence for February tumbled to 56.2, from 61.2 in January.

The University of Michigan index is near the record low of 51.7 that it hit in May 1980. “The index was disappointing, reversing all the gains of the past two months,” said Cary Leahey, an economist at Decision Economics.

The U.S. economy is in bad shape with no sign of immediate improvement, according to a Business Council survey of chief executives. The survey of CEOs, representing some of the largest U.S. companies, found that none expected an economic recovery to begin early this year. Almost 40% said they expected the recession to stretch into 2010.

To survive the downturn, executives said they were relying primarily on a variety of cost cuts—reducing discretionary spending (82%), a hiring freeze (72%), cost-cutting innovation (61%), and lay-offs (58%).

Far fewer were revising existing strategies (11%), speeding new products to markets (17%), or otherwise shifting gears to function in a fundamentally changed economy.

In terms of the U.S. government's efforts to turn the economy around, the CEOs seemed pleased with the Federal Reserve, with nearly two-thirds saying it has had at least some positive impact. Over 90% expect the federal funds rate to be below 1% in July 2009.

In an equally bleak assessment, investors who specialize in distressed debt and bankruptcy foresee the current recession lasting at least three years and possibly longer without some type of a revival in the credit markets.

The U.S. is going through a “Great Recession,” which will provide investors in distressed assets with unprecedented opportunities, according to Michael Psaros, managing partner at KPS Capital Partners. “This is going to be a three- to four-year disaster,” he adds. “There is an inexhaustible supply of bad management out there.”