U.S. Economy Hasn't
Hit Bottom, Survey Says

The weakening U.S. economy has further to fall, according to the majority of economists in the latest Wall Street Journal forecasting survey.

By a 3-to-1 ratio, respondents said the economy is in a recession, and almost three-quarters said the economy hasn't yet hit bottom. "It's hard to say," said Lou Crandall of Wrightson ICAP, because "it doesn't feel like anything we've experienced in decades."

The survey was the first since the Federal Reserve's intervention to prevent the collapse of investment bank Bear Stearns Cos. The vast majority of economists -- 80% of the 46 who answered the question -- approved of the Fed's handling of the Bear Stearns situation.

That didn't translate, into high marks for Fed Chairman Ben Bernanke or Treasury Secretary Henry Paulson, who also was closely involved in the deal. The Fed chairman's grade rose slightly to 78 out of 100 from 75 in February, the last time the survey asked about his performance, but it is still far below the 92 he scored in September. Mr. Paulson's grade dropped slightly -- to 73 from 74 in February. "Bernanke has been too slow," said David Resler of Nomura Securities.

David Wyss of Standard & Poor's Corp. said the Fed was behind the curve through most of last year, moving too slowly in dealing with the credit turmoil, but it has caught up since January. The central bank's unconventional moves are "better than sitting there and watching the world fall apart because you don't have the perfect solution," he said.

Three interrelated issues weighed on the economists' minds. When asked what the biggest downside risk to their forecast was, 35% said further deterioration in the credit markets, while 25% said it was a sharp drop in consumer spending and 13% said continued housing weakness.

Richard DeKaser of National City Corp. was among those who said the economy soon will start to recover. "First, we've begun to see some stabilization in existing- and new-home sales," he said. "Second, the uncertainties plaguing the credit markets are beginning to narrow. And third, the policy actions taken by the government [the economic-stimulus package and Fed rate cuts] will begin to take effect soon."

Mr. Wyss isn't convinced. "Home prices are still diving," he said. "I won't believe that home sales have stabilized until we see the spring numbers, that's when activity picks up." He also said he suspects that consumer spending will slow further.

Ian Shepherdson of High Frequency Economics agrees. "I expect soft consumption will keep growth way below trend right through next year and I would not be surprised by a soft 2010 either," he said. "You can't party for a decade, stop on Saturday and expect the hangover to be gone by Sunday lunchtime so you can go out and start all over again."

Unemployment forecasts supported the point on consumption. After three consecutive drops in nonfarm payrolls, the economists said they now expect the economy to shed an average 1,625 jobs a month over the next year. They expect the unemployment rate, now 5.1%, to rise to 5.6% by December. Meanwhile, just 21% of the economists expect home prices to hit bottom this year, while 67% see the bottom next year and 12% say it won't be until 2010.

The respondents on average expect U.S. gross domestic product, which grew at a slim 0.6% annual rate in the fourth quarter, to expand by an anemic 0.2% in the first quarter and 0.1% in the second, followed by a 2.1% increase in the third quarter. Most of the economists said they expect a contraction in the first half, but those expecting growth pushed the average into positive territory.

Consistent with their view that the economy will hit bottom soon, the economists said they expect the Fed to trim its benchmark federal-funds rate by another half percentage point from the current 2.25% by June -- and then to keep rates unchanged for the rest of the year.

Mr. Wyss, of Standard & Poor's, offered some hope for U.S. investors. "I do think the stock market has hit bottom," he said. "It usually bottoms out three to four months before the economy."