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Recession is here, economist declares

Feldstein heads key forecasting group Slump may be worst since World War II

Email|Print|Single Page| Text size + By Todd Wallack
Globe Staff / March 15, 2008

The United States has already slipped into a deep recession that could be the most serious since World War II, said Martin Feldstein, president of the Cambridge group that is considered the official word on economic cycles.

"The situation is bad, it's getting worse, and the risks are that the situation could be very bad," Feldstein said in a speech yesterday at a financial industry conference in Boca Raton, Fla.

JPMorgan and the Federal Reserve rescue Bear Stearns. B5.

Feldstein, president of the National Bureau of Economic Research and a professor of economics at Harvard University, said the chief causes of the shrinking economy are sinking housing prices, months of job losses, and turmoil in the financial markets.

The National Bureau of Economic Research is the official arbiter of when recessions begin, and it could still be months before the organization makes that determination. If it does, that would mark a formal end of six years of economic expansion.

Economists generally define a recession as two consecutive quarters of economic contraction, something that can only be measured after the fact. The US economy grew at a scant 0.6 percent rate in the 2007 fourth quarter.

Also yesterday, Macroeconomic Advisers, a St. Louis consulting firm run by several former Federal Reserve officials, said the US economy barely grew in January and predicted it declined by 0.7 percent in February.

Feldstein's remarks were punctuated by an extraordinary run of alarming developments yesterday, including surging oil prices, new worries about home foreclosures, and the near collapse of a venerable investment bank that sparked another rout in stock prices on Wall Street.

US investment giant Bear Stearns Cos. yesterday morning received an emergency bailout loan for an undisclosed amount that was facilitated by the Federal Reserve Bank, which invoked a little used Depression-era measure to unleash the funds. Bear Stearns is in dire need of cash after it was forced to write off billions of dollars of losses in mortgage-related investments, and worried investors withdrew their funds.

Bear Stearns's stock lost $3.2 billion of value yesterday, almost half its market capitalization. The major stock indexes all posted steep declines, with the Dow Jones industrial average down 195 points to close below 12,000.

US oil prices, meanwhile, remained above $110 a barrel, after hitting a record $111 on Thursday, putting increasing strain on consumers and businesses alike. United Airlines and Continental Airlines raised round-trip fares by as much as $50 a ticket to help recoup the cost of rising jet fuel prices, the latest in a wave of ticket increases throughout the industry. Heating oil and gasoline prices also surged.

Rising oil prices, in turn, are driving up prices for everything from food to electricity, threatening to end years of modest inflation. Gold prices hit a fresh record yesterday, as investors embrace it as a hedge against inflation and a weakening US dollar, which remained at lows against the euro.

Earlier this month the US Labor Department reported that private employers slashed their payrolls by 101,000 jobs in February, the third straight month of job reductions. Also yesterday a widely followed monthly index of consumer sentiment posted a 16-year low.

In Massachusetts, economists said there are signs the local economy is weakening, but the state still reported a modest increase in jobs in January, better than the nation as a whole. The February unemployment numbers are slated to be released next week.

"We know the national economy is slowing, but the state's economy seems to be stronger because of our tech sector," said economist Alan Clayton-Matthews, a professor at the University of Massachusetts at Boston.

But like much of the rest of the country, Massachusetts has been hurt by falling home prices and rising foreclosures, triggered by risky loans to buyers who bought homes they ultimately could not afford.

Feldstein followed his remarks in Florida with an emphatic statement later in the day.

"The economy is now in a recession," he said. "It will last longer and be deeper than the last two recessions, which lasted only 8 months from peak to trough. It could well be longer and deeper than the recession in the early 1980s that lasted 16 months."

Feldstein's view is increasingly the common one among economists. A Wall Street Journal survey of economists published yesterday found more than 70 percent agreed that the US economy is now in recession.

Mark Zandi, chief economist for Moodys.com, said current economic and sales data overwhelmingly bolster the argument for recession. He further noted that Feldstein was prescient in predicting last year the US economy was due for a rough patch.

"Dr. Feldstein was well ahead of most economists in diagnosing the current problems and suggesting it would result in recession," Zandi said.

Todd Wallack can be reached at twallack@globe.com. Material from Globe wire services was used in this report.

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