U.S. Economy May Shrink 1.5% in 2009

From Bloomberg: U.S. Economy May Shrink 1.5% in 2009 as Recession Stymies Fed
Economists slashed forecasts for U.S. growth in 2009 and projected Federal Reserve policy makers won’t be able to start raising interest rates until 2010, according to a monthly Bloomberg News survey.

The world’s largest economy will contract 1.5 percent this year, a half percentage point more than projected last month, according to the median of 59 forecasts in the survey taken from Jan. 5 to Jan. 12. The slump will push inflation below what some Fed officials consider price stability, the survey showed.

Gross domestic product dropped at a 5 percent annual pace in the last three months of 2008 and will contract 3 percent this quarter, with a 0.8 percent drop in the next three months, according to the survey median. All estimates were lower than in the previous monthly survey.

The odds that the economy will be out of the recession in the next 12 months were 55 percent, the survey showed. Consumer spending, the biggest part of the economy, may fall at a 1.6 percent pace this quarter after dropping 2.7 percent in the last three months of 2008, the survey showed. Combined with the decline in last year’s third quarter, it would be the first time in the postwar era that spending fell during a nine-month span.

Stocks had the biggest one-week drop since November last week on growing concern over the economy and company earnings.

The first simultaneous recession in the U.S., Japan and euro area means American businesses will keep paring output.

Prices are retreating as the economy slows. The Fed’s preferred inflation gauge, based on consumer spending and excluding food and fuel costs, will rise 1.2 percent this year, the smallest gain since 1962, the survey showed. The increase would be less than the long-term forecast of 1.3 percent to 1.7 percent that reflects policy makers’ expectations for the level of inflation given “appropriate” monetary policy.

The deceleration, also called disinflation, is less sinister than the persistent decline in costs that economists call deflation. Still, the Fed last month discussed setting an inflation target to discourage expectations that price increases will slow “below desired levels,” according to minutes of the meeting.