US economy 'could see biggest plunge since 1982'

Experts are warning that economic activity in the longest US recession in 25 years could plunge as much as 6% this quarter – the largest decline since 1982.

While government figures released yesterday for the third quarter showed only a 0.5% drop in the gross domestic product, a key indicator of economic health, two reports on home sales sketched a bleaker picture.

Demand for both new and existing homes fell more sharply in November than expected.

In addition, GDP is probably falling at a sharper pace in the current quarter because of widening fallout from the worst financial crisis to hit the country since the Great Depression.

If GDP does plunge 6% in the fourth quarter, it would be the sharpest such decline since a 6.4% drop in the first quarter of 1982.

“It will get a lot worse before it gets better,” said Nariman Behravesh, chief economist at IHS Global Insight, a Lexington, Massachusetts, forecasting firm.

“We are in the midst of the worst recession in the post-war period, even factoring in a massive stimulus programme.”

Economists said they saw no likelihood of a quick turnaround in housing or the overall economy, given that the credit markets remain locked despite a £467bn (€493.8bn) financial rescue package and billions of dollars of loans supplied by the Federal Reserve.

Mortgage financing has dried up for many potential buyers, further damaging a housing industry struggling with a tide of repossessions.

Meanwhile the Bush administration warned that the country should be prepared for worse news.

“The fourth quarter, because of the credit crisis, the standstill in credit as markets froze up and the financial market turmoil, will be significantly weaker,” presidential spokesman Tony Fratto said.

President-elect Barack Obama’s administration is assembling a package that could reach £567bn (€600bn) for spending on infrastructure such as roads and bridges, aid to states, modernising schools and energy projects.

Vice President-elect Joe Biden told a meeting of Mr Obama’s economic team that as the economy worsened, the need for a bold plan “grows every day”.

But private economists said that even if the Obama administration achieved its goal of enacting a stimulus programme in January, it would not arrive soon enough to keep the economy from enduring a severe downturn well into next year.

The current recession began in December 2007. That means it is already the longest downturn since the 16-month recession of 1981-82. That downturn and another 16-month slump in 1973-75 are tied as the longest recessions since the Second World War.

Some analysts said the downturn could be the most severe since the Great Depression, if measured by both duration and lost output.

The US Treasury Department, meanwhile, said it had provided an additional £3.1bn (€3.27bn) to 92 banks as part of the government’s rescue of the financial system.

The department released a list of 49 banks that got final approval last Friday to receive £1.9bn (€2bn). It said an additional 43 banks received final approval yesterday, but those names would not be released until Monday.

The treasury also confirmed that it had given preliminary approval to American Express and CIT Group to receive support from the £467bn (€493.8m) bail-out fund.