SF Fed economist sees longest recession since WW2

CHICAGO (Reuters) - The United States will likely emerge from recession in the third quarter of 2009 after enduring an 18-month downturn, the longest since World War Two, according to a San Francisco Federal Reserve Bank economist.

Simon Kwan, a vice president at the San Francisco Fed, said in the bank’s latest “FedViews” newsletter, that in terms of severity, or contraction of gross domestic production, the downturn would be almost as deep as the 1981-82 recession.

“The current economic downturn is shaping to be one of the worst in terms of duration, job less and contraction in economic activity in the post-war period,” Kwan said.

Kwan, with input from the bank’s forecasting staff, now sees U.S. gross domestic product declining at an annual rate of by more than 4 percent in the fourth quarter of 2008 and again in the first quarter of 2009.

That marks a sizable reduction from the previous FedViews in late November, when the GDP contraction in the first quarter of 2009 was seen closer to annual rate of 1 percent.

“Recent economic indicators were weaker than expected on balance, and in some cases by a wide margin,” Kwan said.

The U.S. jobless rate could rise by 4 percentage points from its cyclical low, the biggest trough-to-peak increase since the 1973 to 1975 recession, he said.

Unemployment hit a low of 4.4 percent three times during the recent economic expansion, most recently in March 2007.

Kwan said inflation will “moderate rather quickly in the foreseeable future” as slack in the economy continues to build and prices of energy and other commodities decline.

The year-on-year core personal consumption expenditures (PCE) price index was forecast near 1 percent by late 2009 compared with 2.1 percent in October, the most recent figures available.

The overall PCE index is in for a bigger tumble, and on a year-on-year basis could fall more than 1 percent by the time the recession ends, Kwan forecast.

On a brighter note, Kwan said equities prices “could rebound relatively quickly once corporate earnings start to recover” because there was no large run-up in valuations similar to the previous stock market bubble.

Editing by Walker Simon