US Economy: 2009 Forecast

By: CaraTan   Date: 5 December 2008

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Detroit, 5 Dec. The US economy took a beating in 2008, and things are likely to get worse before they get better.

At the University of Michigan’s 56th annual Economic Outlook Conference, economists said the US economy will only hit bottom midway into 2009. They predict unemployment to be around 8%.

University of Michigan economists Stanley Sedo, Janet Wolfe, and Joan Crary said the country would lose around 2.4 million more jobs in the next 18 months. They also said that the real GDP would fall 1% in 2009, and another 2% in 2010, even with a significant financial stimulus package.

Crary said, "Overall, the outlook is extremely uncertain, but any improvement clearly hinges on the return of a functioning credit market. Fortunately, economic crises of this magnitude are rare."

The housing market is still in shambles and demand for new homes has plummeted with a lack of lending and increased unemployment. The Federal Reserve has made rate cuts and implemented other measures to increase liquidity to markets. Economists predict aggressive fiscal and monetary policy in 2009.

The domestic automobile industry is on the verge of collapse, causing profound uncertainty in GM, Chrysler and to a lesser degree Ford, as well as in the many thousand companies that supply to the auto industry. The knock-on effects of an auto industry shakeup are widespread and profound.

Unemployment in 2008 only worsened with Chrysler laying-off 20% of its white-collar workers of 18,500, Whirlpool slashing 5,000, DHL cutting 9,500, Yahoo! Inc. chopping 1,100 and Citigroup Inc. axing 50,000.

As banks fail or lay off workers, carmakers ail, home foreclosures continue, and auto sales plummet, overall confidence sinks. Spending stops as people worry for their jobs, and business investments grind to a halt as companies go into survival mode.

The chief economist for the International Monetary Fund, Olivier Blanchard, said, "Looking at where we are today, the good news, if any, is that we have probably stepped back from the brink of financial catastrophe.”

The good news to consumers is that inflation should flatten off from its high 2008-levels as the price of oil continues to drop and as exports weaken. Europe and much of Asia have been hit hard as well, resulting in this decrease in US exports, which is set to extend through 2009.

Expectations are that consumer prices will rise less than 3% in 2009, despite the fact that Goldman Sachs predicts that oil will slowly climb to $107 a barrel by the end of 2009.

The Energy Information Administration forecasts that the price of petrol will stay in line with the 2008 average of $3.65 a gallon, and that home heating oil will rise a bit to $3.08 a gallon.

Food, however, will not ease up much with economists predicting a 4-5% increase in 2009. Still, this is better than 2008’s 6% rise. This can be attributed to a slowing of world demand and low levels of farm inventories which keep the cost of feed up.

Tony Escobar, EconomyWatch.com

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