U.S. now in recession, jobs to go

NEW YORK (Reuters) - The United States is already in what could be its longest recession in decades due to the global financial crisis, and with unemployment set to soar, the Federal Reserve will cut interest rates again, a Reuters poll showed.

Economists were far more downbeat than five weeks ago, before the collapse of investment bank Lehman Brothers unleashed a month of global market turmoil, and they now say the U.S. economy contracted in the just-finished third quarter and will not grow again until the second quarter of 2009.

Should those predictions hold true, it would be the longest period of declining quarterly U.S. gross domestic product since a run of three consecutive quarters of declines in 1974-1975.

"We expect a moderate recession over the next three quarters due to scarce bank credit and wealth declines in housing and equities that will smother consumer and business spending," said Scott Anderson, chief economist at Wells Fargo & Co.

In September, the mid-range forecast put the chance of recession at 60 percent, with only 18 of 47 economists saying a recession had already begun.

The latest survey found only two of 42 economists believed the United States was not yet in recession.

The debate now is about the severity of the downturn. Of those venturing an opinion, 19 economists see it as an 'average' recession, 10 predict it will be 'deep' and six see it as 'shallow'.

What happened in the past month to so dramatically weaken the outlook? Here's a quick snapshot:

* Lehman Brothers went bankrupt;

* The U.S. government effectively nationalized insurance giant American International Group (AIG.N);

* Credit markets came to a near complete halt and stock markets crashed due to panic selling by investors worldwide;

* The U.S. Congress enacted a historic $700 billion financial rescue package;

* Governments worldwide stepped in to rescue banks from collapse.

4TH-QTR GDP SEEN DROPPING MOST SINCE 3RD QTR 2001

The survey showed economists say the economy likely shrank in the third quarter at an annualized rate of 0.4 percent, a drastic reversal from the previous median estimate of 0.8 growth produced just one month ago.

They expect the economy to shrink by an annualized 1.3 percent in the fourth quarter. That would be the deepest quarterly contraction since the 2001 recession.

Analysts see the recession continuing into the first quarter of 2009, with a 0.5 percent drop in gross domestic product. The economy is set to rebound gradually after that, the poll showed.

A month earlier, economists had predicted growth for all the above periods.

Economists also lowered their growth projections for this year and next. The economy is expected to grow 0.7 percent in 2008 and 0.8 percent next year. The September survey projected 1.6 percent growth for both years.

"With GDP in rapid decline, we look for recessionary conditions to produce a rapid rise in unemployment and worsening corporate profits," said Peter Kretzmer, senior economist at Bank of America.

Results from the poll showed the U.S. unemployment rate will likely creep up to 6.4 percent in the fourth quarter, from the 6.1 percent posted in September. The jobless rate for 2008 as a whole is expected to stand at 5.7 percent.

Economists expect the unemployment rate to continue to rise next year and peak at 7.2 percent in the first quarter of 2010. That would be the highest jobless rate since January 1993.

For 2009, the median forecast for unemployment is 7.0 percent.

RATE OUTLOOK

With the economy set to slow sharply, the Federal Reserve is likely to cut rates further, taking its benchmark federal funds rate down to 1 percent in the current quarter, the poll found.

The Fed last week cut its interest rate by half a percentage point to 1.5 percent in a coordinated move with other major central banks that sought to thaw frozen credit markets.

Moderating inflationary pressures should give the central bank more room to maneuver, analysts said. The poll showed headline consumer inflation will average 4.4 percent in 2008 and then decline sharply to 2.2 percent in 2009 as a whole.

The core inflation rate, which excludes food and energy, is expected to average 2.4 percent this year and 2.2 percent next.

Economists expect the Fed to keep rates unchanged at 1 percent through most of next year, and start raising rates modestly in the final quarter.

(Polling by Bangalore Polling Unit; Editing by Swaha Pattanaik)