Business Economists Predict Recession Will End in Third Quarter

By Mike Caggeso
Associate Editor
Money Morning

A detailed report from the National Association of Business Economics (NABE) says the U.S. economy will recover in the third quarter after a continued contraction in the second.

NABE said the near-term setback will be a result of a "sharp retrenchment" in business investment, but the billions in government efforts to invigorate the economy will soon offset that.

"While the overall tone remains soft, there are emerging signs that the economy is stabilizing," said NABE president, Chris Varvares, who is also president of Macroeconomic Advisers. "The survey found that business economists look for the recession to end soon, but that the economic recovery is likely to be considerably more moderate than those typically experienced following steep declines."

NABE also downgraded its growth forecast for the next few quarters - with the second quarter contracting 1.8%, followed by a meager 1.2% growth in the second half. The end result will be an overall 1.2% contraction for 2009.

However, NABE believes a trio of key factors scaring consumers - job losses, tight credit conditions and declines in home values - are here to stay.

In fact, unemployment will likely reach as high as 9.8% by the end of the year while inflation moderates and oil prices remain "relatively depressed."

NABE's outlook is the consensus of a 45-person panel of economists.

Mixed Forecasts

NABE's report joins a chorus of national and international institutions (both government and private) that have issued their own predictions of when the clouds will part over the global economy.

Earlier this month, U.S. Federal Reserve Chairman Ben Bernanke testified to the congressional Joint Economic Committee that the U.S. economy will begin to "turn up later this year," Reuters reported.

But such recovery is contingent upon the financial sector's continued improvement, Bernanke said.

"We continue to expect economic activity to bottom out, then to turn up later this year," Bernanke told the committee. "An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall."

Though Bernanke's general timeframe for recovery is similar to NABE's, there are a few differences in their outlooks. Bernanke said the housing market may be bottoming out and pointed to improving consumer spending, two areas NABE said will continue to remain depressed.

More broadly, the International Monetary Fund (IMF) recently slashed the growth forecast for every major country and urged more recovery actions. In its latest global outlook, the IMF said the global economy will likely contract 1.3% this year and post a 1.9% gain next year, Reuters reported.

And while the World Bank sees the global contraction easing and expects a recovery in late 2009, its report, "Swimming Against the Tide: How Developing Countries are Coping with the Global Crisis," warns that 94 out of 116 developing countries have experienced a slowdown in economic growth. Of those, 43 have high levels of poverty.

Moreover, only one quarter of the most vulnerable countries have the resources to prevent a rise in poverty, the World Bank said.

"We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest," World Bank President Robert Zoellick said in the report.

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