Economy set for longest post-War contraction: poll

By Pedro Nicolaci da Costa

NEW YORK (Reuters) - The U.S. economy is headed for its longest period of contraction on record as prolonged downturns in housing and stocks keep the once-insatiable consumer away from stores, according to a Reuters poll.

For the first time, forecasts in the monthly survey were pointing to four straight quarters of gross domestic product declines, the most drawn-out losing streak on records that date back to 1947.

The economy was seen shrinking 4.3 percent in the fourth quarter alone, with many looking for an even steeper pullback in activity. That would then be followed by drops of 2.6 percent and 0.6 percent in the first and second quarters of next year.

"This will be the longest if not the deepest recession in the post-war period," said Scott Anderson, chief economist at Wells Fargo.

The poll gave a median 90 percent probability that the Federal Reserve would try to douse the economic fire by pushing interest rates to zero, or by buying up distressed assets in an effort to revive demand -- quantitative easing.

But the vast majority still expect the federal funds rate to fall to 0.5 percent from the current 1.0 percent and be cut no further. Only 13 of 105 economists forecast rates to fall to zero in the next several months.

But some economists said quantitative easing in the U.S. is underway, even if rates aren't yet at zero.

"With the Fed signaling that it will buy agency debt, mortgage-backed securities, and asset-backed securities, quantitative easing has already begun," said Scott Brown at Raymond James.

He said the Fed would stop lowering the funds rate at 0.5 percent, rather than go to zero.

Low inflation should enable them to do so without the danger of a spike in costs. The poll predicted consumer prices will rise just 0.4 percent next year, down from a projected 4.0 percent rate for 2008.

One key problem in the months ahead will likely be a continuing deterioration of the labor market outlook. The economy has already lost nearly 2 million jobs in this recession, with more than 500,000 cut in November alone.

David Rosenberg, chief North America economist at Merrill Lynch, says he would not rule out a jump in the unemployment rate above 10 percent, a level above even the most pessimistic forecasts making the rounds.

"I wouldn't hazard to say we're past the halfway mark on job losses," said Rosenberg.

Following are a few more highlights from the poll:

* Ninety of the 105 economists polled see a 50 bps cut this meeting, 6 see 75 bps and 4 see rates going down to 0 percent. One sees 25 bps cut and 4 expect rates to remain unchanged