Economic data point to recession

The US economy is almost certainly in recession and facing a long period of weakness that could push unemployment to its highest level since the early 1990s, economists said.

Even as lawmakers and the Bush administration tried to craft a $700 billion bailout plan for financial firms, the government yesterday reported data that suggest the economic slide is quickening. Workers filing first-time claims for unemployment surged to almost 500,000 last week, up more than 50,000 in the past month alone; new home sales plunged 35 percent from a year ago; and orders for computers, ma chinery, and other expensive equipment fell sharply last month, a sign that business are cutting spending.

"If businesses are cutting back, jobs are going down," said Nariman Behravesh, chief economist at Global Insight, a Waltham forecasting firm. "We're in a mild recession that's becoming worse."

Yesterday's gloomy economic data were the latest in series of reports showing the weakened US economy getting even weaker. Employers have cut more than 600,000 jobs since the beginning of the year, and the unemployment rate has jumped more than a point, to 6.1 percent. Home prices continue to fall and consumers, struggling under heavy debt and high energy costs, are cutting spending, the main driver of the US economy.

Retail sales, a measure of consumer spending, have declined in each of the past two months, the Commerce Department reported recently.

Economists say the crisis on Wall Street is making things worse. The turmoil has made credit harder to get and pushed interest rates higher, curtailing both the business and consumer spending that drives economic growth and hurting the chances of a housing market recovery.

Mortgage rates jumped above 6 percent again this week, to a national average of 6.1 percent from 5.8 percent last week, according to Freddie Mac, the government-created, and now government-run, mortgage company.

As a result, many economists forecast a longer, deeper downturn, with no significant recovery until 2010. Unemployment could rise to 7 percent or higher, a level not seen since 1993.

"We have a severe recession in housing, a severe recession on Wall Street, and the question is to what extent will the turmoil weaken other parts of the economy," said James O'Sullivan, economist at UBS AG in Stamford, Conn. "The choice is a little more or a lot more, and right now the momentum is towards a lot more."

In Massachusetts, so far, the downturn has not been as severe, due to the strength of the state's technology, higher education, and healthcare sectors, which have helped insulate the broader economy from the housing downturn. Employment has continued to grow in Massachusetts this year, albeit barely, even as the nation shed jobs, rising less than half a percent. The University of Massachusetts forecasts the state economy to expand weakly over the next six months.

But there are reasons to worry here, too, said Alan Clayton-Matthews, an economic forecaster and professor at the University of Massachusetts-Boston. The state's unemployment rate has jumped nearly a point since the beginning of the year, to 5.3 percent. In addition, first-time claims for jobless benefits have risen nearly 20 percent from a year ago and are approaching 40,000 a month, a level considered recessionary.

"This reflects a rapidly weakening economy, and we haven't felt the impact from all the bad news from the beginning of September," he said. "That's what I'm going to be watching."

Earlier this month, Lehman Brothers Holdings Inc. collapsed in bankruptcy, and insurance giant American International Group was taken over by the Federal Reserve to prevent its collapse from damaging the global financial system. Each had large holdings of mortgage-related assets, including investments backed by mortgage payments, which rapidly lost value as the US housing market continued to slide. When the investments lost value, those companies were left short of cash. Panic selling around the world followed.

The proposed $700 billion bailout, aimed at stabilizing markets and ending the credit crunch, is unlikely to halt the slide, although the downturn will worsen if Congress doesn't act, economists said. Wall Street's problems are more a symptom than a cause of the downturn, which began in the housing bubble of a few years ago.

The bailout plan calls for the government to buy mortgage-backed securities from financial firms as a way to restore confidence. The credit crunch has grown because financial firms became reluctant to lend to each other out of fear the other party has large holdings of these securities. That's what brought down firms such investment firms Lehman Brothers and Bear Stearns Cos. and mortgage giants Fannie Mae and Freddie Mac.

Peter Seltzer, who owns a carpet-cleaning company in Hopkinton, said economic conditions are already worse than he's ever seen. In past recessions, he said, his business boomed as people opted to clean carpets instead of buying new ones.

But now, customers are putting off even cleaning their carpets as they struggle under high energy and food costs and worry about jobs. Those who do hire him often want less done, maybe a room or two, instead of the whole house. Sales at his one-man business are down 50 percent from a year ago, even as his costs, from insurance to diesel fuel for his truck, soar. Meanwhile, unlike in years past, he can't find a line of credit.

"You don't sleep at night worrying about these things," he said. "Never in all my years have I woken up feeling I have to do all that day's jobs. If someone cancels, I'm not going to be able to meet my obligations."

Robert Gavin can be reached at rgavin@globe.com.