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Recession Fears Rise As Economy Continues To Falter

March 9, 2008

The job market’s deterioration comes as oil prices climbed this week to a record $105.47 a barrel. Meanwhile, the Mortgage Bankers Association reported a record number of American homes went into foreclosure the last three months of 2007, and the Federal Reserve said homeowner equity, battered by sliding home prices, fell to the lowest level since World War II. This all means a tighter squeeze on consumers, who are likely to pull back on spending, which drives about 70 percent of the US economy.

Stock prices, too, continued their slide. The Dow Jones industrial average shed 146.70 points yesterday, closing at 11,893.69, the lowest since October 2006.

“It’s a very toxic mixture,” said Nigel Gault, chief US economist at Global Insight, a Waltham forecasting firm. “Things are go ing to get worse in the immediate future.”

President Bush, reacting to the unexpected job losses, yesterday acknowledged economic activity has slowed. But he said the recently approved package to stimulate the economy, primarily through tax rebate checks to most Americans, will provide a “booster shot.” In addition, aggressive interest rate cuts by the Federal Reserve will provide a further lift.

Economists expect the Fed to cut rates again, perhaps by three-quarters of a point, when policy makers meet March 18. The Fed has already cut the benchmark rate by 2.25 points since September, to 3 percent, the lowest level in nearly three years. Many economists forecast that the rate, which influences just about every other borrowing rate, will fall to 2 percent or lower before the Fed is done cutting.

Lower interest rates aim to stimulate the economy by reducing borrowing costs, which encourage businesses and consumers to borrow and spend. But the impact of rate cuts has been blunted by the so-called credit crunch as banks, many sustaining huge losses from rising defaults in risky mortgages known as subprime, have become reluctant to lend.

“The rate cuts are setting the stage for better times later, but they can’t deal with the credit crunch going on,” said Allen Sinai, chief economist at Decision Economics Inc., a Boston financial market advisory firm. “We are in a very dangerous situation that the downturn won’t be mild and short, but long and deep.”

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