Consumers Wary As U.S. Economy Shrinks
MICHELE NORRIS, host:
It's All Things Considered from NPR News. I'm Michele Norris.
ROBERT SIEGEL, host:
And I'm Robert Siegel. And in case you need further confirmation that the economy is in trouble, well the government provided some definitive evidence today. It released data showing the economy went into reverse in the late summer. As NPR's John Ydstie reports, most economists think the worst is yet to come.
JOHN YDSTIE: The government's report on growth in the third quarter, the July through September period, showed the U.S. economy declining at an annual rate of three-tenths of one percent. The big reason was a very sharp drop in consumer spending. Not surprising given the forces lined up against consumers, says Laurence Meyer, a former Federal Reserve governor.
Dr. LAURENCE MEYER (Vice Chairman, Macroeconomic Advisers; Former Governor, Federal Reserve): In the third quarter, we were still having some effect of the earlier rise in energy prices. We have a weakening labor market. We have falling home prices and equity prices undermining household wealth. We have tighter credit conditions.
YDSTIE: It adds up to the biggest fall in consumer spending since the severe recession of the early 1980s, and it's pushed this economy into recession, says Meyer.
Dr. MEYER: I think there's no question the economy is in a recession, and the question is, you know, how long and how deep is it going to be?
YDSTIE: Meyer, now vice chairman of the forecasting firm, Macroeconomic Advisers, thinks the recession will extend into mid-2009 and unemployment will rise to about seven and a half percent. But he doesn't think the downturn will be extraordinarily deep. Nouriel Roubini, an economics professor at New York University's Stern School of Business, is more pessimistic, a view he shared with Congress' Joint Economic Committee this morning.
Dr. NOURIEL ROUBINI (Professor of Economics and International Business, Stern School of Business, New York University): I expect that this recession is going to last at least 18 months, if not 24 months. This is going to be much longer, more severe, more protracted than the average U.S. recession that lasts only 10 months.
YDSTIE: Roubini possesses a certain level of credibility right now because he predicted much of the financial crisis that has pushed the economy into recession. He told lawmakers today that this would be the worst recession since World War II, unless they enact another stimulus package quickly. Because consumers and businesses are in retreat, he says, the new stimulus package should not be in the form of rebates to companies, which are cutting back on spending, or to individuals, who would probably save it or use it to pay off debt. He believes the stimulus should come in the form of government spending.
Dr. RUBINI: Of course, you want to have this spending on things that are productive, like infrastructures, like investments in, maybe, alternative energy or renewable energy. And you also have to provide aid and income to those parts of the economy that are more likely to spend it. So, aid to state and local government is going to be effective, increasing unemployment benefits, food stamps to people that are poor.
YDSTIE: There has been support for those kinds of measures building in Congress, but the Bush administration is skeptical of that approach. Commerce Secretary Carlos Gutierrez, whose department released the GDP report containing the bad news on the economy today, says a stimulus package should have an immediate impact on the economy.
Secretary CARLOS GUTIERREZ (Department of Commerce): What we have heard that people are putting into a so-called stimulus package at Congress, you know, contains projects that take three, four years to complete, projects that take months, even years to get started. And I'm not saying those are bad projects. I'm just saying that those aren't stimulus.
YDSTIE: Nouriel Roubini counters that given the potential length of this recession, up to two years in his view, sustained stimulus from longer-term projects should be considered. John Ydstie, NPR News, Washington.