The Nation's Financial Crisis Worsens
Thursday, October 30, 2008PAUL KANGAS: Pressure is also mounting for the government to help resuscitate the economy. Gross domestic product, the broadest measure of the economy, shrank by 0.3 of a percentage point in the third quarter. That's the worst showing in seven years. That's a sharp reversal from the second quarter's 2.8 percent increase. Erika Miller takes a look at the report and the outlook for the economy from here.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: The economy's performance in the third quarter was downright dismal. But economist Drew Matus warns things are likely to get a lot worse before they get better.
DREW MATUS, ECONOMIST, MERRILL LYNCH: We're not anticipating positive growth in the economy until 2010. The duration is really going to be the story in this particular recession. At its deepest we could see a minus 4 percent reading for GDP growth.
MILLER: The reason economic growth turned negative in the third quarter is that consumer spending plunged by the biggest amount in nearly three decades. Economist Joe Lavorgna sees more belt-tightening ahead.
JOSEPH LAVORGNA, CHIEF US ECONOMIST, DEUTSCHE BANK: What worries me is where we're going this quarter. With the credit crunch and perhaps the inability of people to get credit to spend, and that means we could have consumer spending fundamentally weaker for a much longer period of time.
MILLER: Lack of credit is not the only reason consumers are slashing spending. They're also worried about their jobs, falling home prices and the falling value of their investments. Against that backdrop, economists say this recession will be hard to reverse.
MATUS: This one is going to be a little longer lived, in part because the U.S. consumer is leading it but also, in part because we still have a housing recession that's underway and capital equipment spending is also going into recession, as corporations cut back. So we have multiple levels of things going wrong in the U.S. economy right now.
MILLER: To make things go right, economists generally want Congress to pass another fiscal stimulus plan. Many also applaud the Federal Reserve's decision to lower interest rates yesterday to encourage lending to businesses and consumers.
LAVORGNA: The Fed's going to be on hold at either 1 percent or possibly a bit lower for a very long period of time until it becomes obvious that one, either the financial markets are noticeably improving or two, the economy is in a self feeding cyclical recovery. And one could make a compelling case that won't happen until 2010 at the earliest.
MILLER: Economists say they'll know things are poised for recovery when home prices stabilize. But they warn that's not likely until the credit crunch eases and the job market improves. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
