Recession seen worsening, deflation a risk               

Jim Christie

SAN FRANCISCO (Reuters) – The "nasty" U.S. recession

will tighten its grip next year as unemployment rises and

weak home and stock prices imperil consumers, finance

firms and debt-laden businesses, a UCLA Anderson

Forecast report released on Thursday said.

Additionally, a sustained retreat in prices for goods and

services is a very real possibility that would further drag

on the economy, according to the forecasting unit's

report.

"Where only last quarter we were worried about inflation,

we are now worried about its very rare opposite:

deflation," the report said. Falling prices would cut demand 

and discourage employers from hiring.

"The record collapse in oil prices has brought with it

welcome relief to motorists throughout the country and an

effective tax cut of $440 billion in the form of a lower oil

import bill," the closely-watched report said. "Nevertheless

the swift fall in oil prices is now lowering the absolute level

of consumer prices and bringing with it likely declines in

nominal GDP over the next three quarters."

Where the forecasting unit in summer had projected a

"subprime" outlook for the U.S. economy through the end

of next year with growth at just above 1 percent, it now

sees the economy facing a winter of discontent.

"The news from the economy is bad," the report said. "The

recession that we had previously hoped to avoid is now

with us in full gale force."

The UCLA Anderson Forecast unit expects real GDP to

shrink by 4.1 percent this quarter and by another 3.4

percent and 0.8 percent in the first and second quarters

of next year, respectively, as consumer and business 

spending weaken and as the foreign trade that had

propped up growth much of this year sags.

"Because Europe and Japan are already in recession and

China and India are suffering from a significant slowdown

in growth, the export boom of the past few years will 

wane," the report said. "Make no mistake the global

economy is in its first synchronized recession since the

early 1990s."

By late 2009 the U.S. unemployment rate will hit 8.5

percent, compared with 6.7 percent in November, as

employers shed an additional two million jobs over the

next year.

The historical long-term trend of 3 percent growth will not

resume until 2010, the report said.

The administration of President-elect Barack Obama and

Congress should act quickly next year to pass an

economic stimulus package, said David Shulman, the

report's author.

"They're talking a lot of infrastructure, which makes a lot

of sense. They're talking a middle-class tax cut. I think

when Congress gets through with this they'll be raining

money on the economy," Shulman said.

(Reporting by Jim Christie; editing by Carol Bishopric)

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http://news.yahoo.com/s/nm/20081211/bs_nm/us_economy_usa_forecast

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