Business

Fed says economy will get worse in 2009

Posted February 18, 2009 6:50 p.m. EST
Updated March 9, 2009 5:12 p.m. EDT

Money

— The Federal Reserve warned Wednesday that the nation's crippled economy is even worse than thought and predicted it would deteriorate throughout 2009, with no sign that the housing market will stabilize.

The Fed's bleak estimates indicated that unemployment could climb as high as 8.8 percent this year and that the economy would contract for a full calendar year for the first time since 1991.

Ken Bell, a financial planner with Aspera Financial in Cary, said that the Fed's predictions are overly optimistic

"It's more positive than mine. They've adjusted their forecast. Their forecast is more negative than it had been,” Bell said.

The Fed's latest forecast says the unemployment rate will climb to between 8.5 and 8.8 percent this year. The old prediction, issued in mid-November, estimated that the jobless rate would rise to between 7.1 and 7.6 percent.

Bell said it wouldn't surprise him to see the national unemployment rate reach 10 percent. He also said the worst housing, credit and financial crises since the 1930s has been building for years.

“We had done nothing but borrow and borrow and borrow and save nothing and that got to unprecedented levels. That's starting to unwind. That's healthy. We're going to have to pay for it for a number of years, but ultimately that's healthy,” Bell said.

The Federal Reserve's latest projections came hours after a separate report showed that new home construction and applications for future projects both fell to record lows last month.

Still, some economists saw a silver lining in the otherwise dismal housing report: Scaled-back building should reduce the number of unsold homes and contribute to an eventual housing recovery.

Small business owners are also hoping for some relief.

“Right now, we have our tops 20 percent off and typically for us our tops are big sellers. So rarely do we ever have to mark them down,” Julie Sezer, owner of Denim and Lace.

The upscale boutique opened three years ago in Cary. Sezer said sales were steady until six months ago.

“We're just going to be bringing in less merchandise, trying to be really sure about what we are bringing in. The things that have been tried and true for us,” Sezer said.

Employment is usually the last piece of the economy to heal once the country is out of recession and in recovery mode. Businesses are usually reluctant to ramp up hiring until they feel confident that any recovery has staying power.

Under the Fed's new projections, the economy should grow between 2.5 and 3.3 percent next year and by as much as 5 percent in 2011, which would be considered robust.