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50% chance of depression in US

Bloomberg
Published: December 20, 2008, 22:40


San Francisco: The US economy has a 50 per cent chance of falling into a depression during the next three years, said Roger Farmer, a member of the National Bureau of Economic Research's economic fluctuations and growth programme.

"There's a significant probability things will get worse," Farmer, 53, said during a phone interview Friday. "We're certainly not at the end of the recession and things are getting worse."

A drop in the Conference Board's index of leading indicators, released Thursday, underscores econo-mists' expectations that the recession will be the longest in the postwar era as banks restrict credit, home and stock values plunge, and job losses mount. Farmer said he is predicting the US recession will last at least another year.


"Everything depends on business confidence, and what I see is declining confidence," said Farmer, who is also graduate vice-chair of the Economics Department of the University of California at Los Angeles.

The loss of confidence is leading households and companies to undervalue assets, which is hurting consumer spending and investment, he said. A government fiscal stimulus programme will have a "questionable" immediate effect on consumption and financial markets, Farmer said.

Instead, he said he supports the idea of letting the Federal Reserve or government step into the stock market by buying indexed securities such as those linked to the Standard & Poor's 500 Index.

Left to itself

"I don't think anything from historic episodes suggests that, left to itself, the economy is going to magically recover and come back to full employment," he said.

Employers cut 533,000 jobs from payrolls in November for a total loss so far this year of 1.9 million, which more than erases the 2007 gain of 1.1 million. The unemployment rate, now at 6.7 per cent, may go above 10 per cent, Farmer said.

Farmer's views on the likelihood of a US depression contrast with those of other economists, such as New York University professor Nouriel Roubini, who told Bloomberg Television last week that he sees a severe recession and not a depression.