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Economic gloom grows

Prices drop a record 1%, but for ominous reasons. The Fed sees recession until at least mid-2009.

November 20, 2008|Maura Reynolds and Ronald D. White | Reynolds is a writer in our Washington bureau; White is a Times staff writer.

LOS ANGELES AND WASHINGTON — Although consumers got some welcome news Wednesday about the prices they pay, the clouds over the economy loomed larger than ever.

The Federal Reserve warned that a recession believed already to be underway could last until mid-2009 or later. That's likely to mean interest rates will be cut again soon, the central bank indicated.

That, along with other economic concerns including the fate of Detroit's ailing carmakers, sent Wall Street into another panic. The Dow Jones industrial average tumbled 427 points, or 5.1%, closing below the 8,000 mark for the first time since early 2003.

The Labor Department reported that consumer prices fell a record 1% last month from September's level, bringing the inflation rate for the last 12 months to a relatively modest 3.7%. Energy prices led the way down with an 8.6% one-month decline.

On their own, lower prices are good for consumers and the overall economy.

Gary Schlossberg, senior economist for Wells Capital Management in San Francisco, said that every $1 decline in the cost of a gallon of gasoline puts $100 billion a year back in U.S. consumers' pockets. So with pump prices down more than $2 since their high in July, that would in effect be a $200-billion stimulus for the economy over the course of a year.

"If you're paying less for gasoline, you have more money left over to buy other things," Schlossberg said.

But in this case, lower costs stem in large part from a global economic contraction that has reduced demand for goods and services, causing inventories to pile up and forcing suppliers to cut prices.

Moreover, the benefit of more affordable energy is easily offset by the shrinking value of consumers' homes and stock portfolios, said Gus Faucher, chief U.S. economist with Moody's Economy.com. For every $10,000 in lost equity, he estimated, consumers spend about $500 less over two years.

"We expect to see consumer spending to be flat before inflation," translating after inflation into a rare decline, he said.

Such gloom pervaded the Fed's release Wednesday of its quarterly economic outlook, which made public the poor projections that led the agency to make two half-point reductions in its key interest rate last month.

Those attending a meeting three weeks ago of the Fed's rate-setting committee "generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009," according to minutes released Wednesday.

The government reported Oct. 30 that the economy shrank at a 0.3% rate in the third quarter of this year.

The Fed policymakers also expected that "the subsequent pace of recovery would be quite slow" and that "the unemployment rate would increase substantially further," the central bank said.

The committee members lowered their economic growth projections for next year to an annualized rate of -0.2% to 1.1%, down from a range of 2.0% to 2.6%.

The central bank even revealed concern that the sudden disappearance of inflation could be a bad thing, alluding to the potential for a catastrophic episode of broad-based deflation, last experienced in the United States during the Great Depression. Some Fed policymakers expressed support for more aggressive rate cuts, saying they would reduce the odds of such an outcome, the minutes say.

The dark economic outlook is leading many people to save more of their earnings to compensate -- another reason that consumer spending has slowed, said Dean Baker, co-director of the Center for Economic and Policy Research.

"People are scared to death," he said.

It makes sense for consumers to rebuild their savings because most were spending beyond their means for the last several years, Baker said. So if the economy is going to get a boost, he said, it will have to come from government spending.

"I'm hoping Congress passes a big stimulus package," he said. "But even if they do, it will only soften the fall."

Consumers on Wednesday certainly noticed the good news at the gas pump, and were grateful for whatever relief they could get, even though it did little to offset the economy's overall weakness.

Sal Robledo, 42, owns a small business in Upland that installs telecom systems. He has two employees who go along with him on jobs, with everyone squeezed into the relatively tight confines of a 2002 Ford Ranger he bought when gasoline prices started to rise last year. Before, he relied on a much roomier, much thirstier Chevy Astro van.

But even with a smaller vehicle, when gasoline was selling at $4.50 a gallon it was a nightmare trying to eke out a profit while driving as many as 450 miles in a week.

"It was just crazy," Robledo said. "I usually charge a trip fee depending on how far I have to drive, and I raised it from $25 to $40. I couldn't raise it fast enough to keep up. I had to raise it that high just to keep making a little money."

The high fuel prices forced Robledo along with his wife, Victoria, and 16-year-old daughter, Naomi, to retrench in a big way. Most of the family's entertainment -- such as movies and weekend carnivals -- was eliminated. He and his wife also decided not to drive long distances to see Naomi play softball.

"It's bad when you can't watch your daughter play a softball game," Robledo said.

But this week, going to the gas station was almost a pleasant experience. "It cost me $35 to $36 to fill up," Robledo said. "It felt great."

And he's been able to reduce his trip charge substantially, to between $20 and $25.

Robledo and his wife are enjoying nights out again and, barring a rebound in pump prices, are looking forward to attending all of their daughter's games.

--

maura.reynolds@latimes.com

ron.white@latimes.com

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