Economists Expect U.S. Crisis to Deepen

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The U.S. economy has sunk into a recession and government action is critical to stem the damage, according to economists in the latest Wall Street Journal forecasting survey.

"We're in the middle of a very dark tunnel," said Brian Fabbri of BNP Paribas, referring to the worsening credit crunch. "Each day we see another crack in the system."

Those cracks are quickly adding up. On average, the 52 economists surveyed now expect gross domestic product to contract in the third and fourth quarters of this year, as well as the first quarter of 2009.

This is the first time that survey forecasts for those periods have turned negative. If those predictions bear out, it would mark the first time U.S. GDP—the total value of goods and services produced—has contracted for three consecutive quarters in more than a half century. Economists put the odds of recession in the next 12 months at 89%, up from 60% in last month's survey.

It is a challenging scenario for the next president, as the election moves into the home stretch. Either Sen. John McCain or Sen. Barack Obama likely will face an economy in the midst of recession on Inauguration Day, even if the credit crisis begins to ease. The new administration will have to get up to speed quickly, taking over the largest government intervention since the Great Depression.

Among economists surveyed, 54% said they think the next president should launch an economic-stimulus package in January.

Economists were divided on where the stimulus should go. Some 13% said it should be used to increase food stamps and unemployment benefits; 9% preferred infrastructure spending; 4% favored taxpayer rebates and 28% said it should be some mix of those options.

In August, when asked if the U.S. should consider another stimulus package, 66% of respondents said no. That dropped to 46% in the September survey.

"A month or two ago I wouldn't have said we needed another stimulus," said David Wyss of Standard & Poor's Corp. "I thought we'd be out of this before a stimulus package had any time to take effect. Now that's not likely to be the case."

Tight credit markets have exacerbated the downturn. The unemployment rate stood at 6.1% in September, up from 5% as recently as April, amid job losses during every month of 2008. The economists expect an average of 74,000 job losses a month for the next 12 months with the unemployment rate reaching 6.8% by June, a level last seen in 1993.

As companies find it harder to secure financing, business spending is likely to be constrained and layoffs are expected to mount.

At the same time, demand continues to falter. The Institute for Supply Management's manufacturing activity survey breached recessionary levels in September, even before the latest turmoil fully took hold. Consumer spending is likely to turn negative this year, as households feel the pinch of job cuts and decreased purchasing power.

"For much of the year, policy makers warned about financial headwinds," said Lou Crandall of Wrightson ICAP. "If the credit mechanism deteriorates further, we'll hit a financial brick wall instead."

While 98% of respondents said the Treasury Department's plan to purchase troubled assets will have at least some stabilizing effect, 33% expect major problems to persist. Half the economists said the plan should have dealt more with recapitalizing banks.

The legislation focuses largely on removing distressed assets from banks' balance sheets but does allow Treasury to take stakes in banks. U.S. Treasury Secretary Henry Paulson, in a marked shift in rhetoric, played up the authority to "to inject capital into financial institutions" in remarks this week, signaling the government is considering buying equity stakes in financial institutions.

"More bank capital is the biggest need in the economy now," said James Smith of Western Carolina University and Parsec Financial Management.

Not everyone agreed. "We may get to the point where we need to inject capital into banks, but we're not there yet," Mr. Crandall said. "That holds the greater potential reward for economy but creates more risk for taxpayers."

Mr. Paulson's reputation took a hit following the battle with Congress over the plan. When asked to grade the secretary's performance, economists on average dropped his score to 67 from 74 in July. Grades for Federal Reserve Chairman Ben Bernanke fell to 72 from 77 in July. Federal Deposit Insurance Corp. Chairwoman Sheila Bair fared best at 80.

About the Survey

The Wall Street Journal surveys a group of 56 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted every month. Once a year, economists are ranked on how well their forecasts have fared. For prior installments of the surveys, see: http://online.wsj.com/page/economic-forecasting-survey.html.

Write to Phil Izzo at philip.izzo@wsj.com