WASHINGTON — It may come as a surprise, given all the bad news of late, but the U.S. economy is expected to emerge from the recession sometime around mid-2009.
Until that happens, the economy will remain mired in one of the deepest and longest downturns the nation has seen in decades.
If the recession continues past the spring, as many economists predict, it will be the most prolonged one since the Great Depression. Employers are expected to continue to shed jobs at a rapid pace. Consumers will pull back spending. Businesses will cancel equipment purchases. Unsold, empty homes will dot city blocks.
However, once the massive amount of fiscal stimulus currently being crafted by lawmakers and aggressive action by the Federal Reserve kicks in, the economy is expected to improve, according to several economists and business owners.
Predicting the economy's future is particularly tough this year, given rapid changes in the economy and financial markets, and uncertainty about what course of action Congress and President-elect Barack Obama's administration will take to boost the economy in the new year, said Conrad DeQuadros, senior economist at consulting firm RDQ Economics.
"When it comes to all of these forecasts, there is a lot less clarity than usual," he said.
A look at five key areas of the economy to watch in 2009:
Jobs: The outlook for jobs is probably the worst aspect of the economy in 2009. Employers are expected to trim payrolls until the end of the year, shoving the jobless rate above 8 percent, according to forecasts from Barclays Capital, John Hancock Financial Services, Citigroup, Mission Residential, Wachovia and National City.
That excludes those who have given up on finding jobs or who work part time because they can't get full-time work. The jobless rate was 6.7 percent in November, the highest in 15 years.
Job losses could be particularly brutal in the first half of the year. Last month, 60 percent of U.S. CEOs said they expect to cut workers in the next six months, according to the Business Roundtable. Even after the economy stabilizes, job losses probably will continue for a while. That's common in recovery periods as wary businesses await more evidence that the economy is on solid footing. Employers cut jobs for nearly a year after the 2001 recession ended, for example.
Housing: The long-depressed housing market is widely expected to hit a bottom in 2009. But the rebound probably will be very slow and gradual, given rising unemployment and a sluggish economy.
While sales and construction are expected to flatten or edge higher, it's more murky as to when prices will stop falling.
The timing of the price recovery depends, in part, on how strongly state and federal governments step in to stop foreclosures, economists say. Wells Fargo senior economist Scott Anderson predicts prices won't rebound until 2010 because home sellers will keep cutting prices to compete with banks selling foreclosed homes.
Consumer spending: Consumer confidence has taken an enormous hit in recent months, and Americans are expected to be tight with money early in the year, then slowly increase their spending.
The massive loss of wealth from the decline in stock and home prices has taken a huge toll on U.S. households. Net worth was down more than 11 percent in the July-September quarter from a year earlier, according to the Federal Reserve. When people are less wealthy — even on paper — they tend to spend less. And Americans finally are building up their savings — after years of spending more than they earned.
"When unemployment is high and confidence is low, people accumulate a little bit of a nest egg," National City chief economist Richard DeKaser said.
Business spending: Businesses are expected to cut spending dramatically through much of 2009. A number of economists, including those at Citi, UCLA, National City and Wachovia, don't expect business investment, which accounts for about a 10th of U.S. economic activity, to decline through 2009.
According to a survey of 679 chief financial officers from Duke University and CFO Magazine, U.S. businesses expect to cut capital spending by more than 10 percent in the next 12 months, a sharp deterioration from September, when the CFOs expected business investment to increase slightly.
Prices: With the economy in a slump, prices are falling for a variety of goods — prompting worries that the economy could sink into a deflationary spiral. Deflation is a broad, sustained decline in prices that is hard to stop once it takes hold. If consumers expect prices to decline, they put off making purchases, thus crippling the already weak economy.
While many economists say the chances of deflation are remote, the Federal Reserve is taking no chances. This month, the Fed slashed interest rates to near zero.
Home loan troubles break records again
Real Estate Outlook: Affordability Dramatically Improved
Jobless claims make surprise jump
