US consumers and professional forecasters have cast off the last remnants of economic optimism, reports showed on Friday, as they confronted the grim reality of a long and deep recession. The US economy will shrink a whopping 5.2 percent in the first quarter on an annualised basis, its worst performance since 1982, according to a quarterly forecasting survey published by the Philadelphia Federal Reserve.
US consumer confidence fell to its lowest in three months in February as sentiment grew increasingly gloomy over an economic downturn that most expect to last up to five years, according to the Reuters/University of Michigan Surveys of Consumers. "Confidence fell in early February as consumers came to the consensus that the economy would remain in recession throughout 2009," the report said. The Reuters/University of Michigan Surveys of Consumers said its index reading of confidence for February tumbled to 56.2 from 61.2 in January.
That was the lowest since November, when US stocks hit 11-year lows during one of the worst periods of the current financial crisis. A separate reading in the report showed consumer expectations fell to their lowest since May 1980.
The main confidence index was well below economists' median expectation for a reading of 61.0 culled from 60 forecasts in a Reuters poll that ranged from 56.5 to 64.0. The University of Michigan confidence index dates back to 1952. Currently it is still near the record low of 51.7 that it hit in May 1980, when the US economy was mired in one of the worst downturns since the Great Depression.
The index managed to gain in December and January, but February's fall suggested the recovery - or bottoming at least - that many economists had hoped for is now in danger. One-year inflation expectations plummeted to 1.6 percent from January's 2.2 percent for the lowest since November 2001, highlighting worries that the United States might be headed for a deflationary period of falling prices, wages and economic activity. However, five-year inflation expectations edged up to 3.0 percent from January's 2.9 percent.
That was the highest since September 2008 and is consistent with concerns of some in the financial markets that massive spending and borrowing by the government to bail out the economy might prove inflationary. In the Philadelphia Federal Reserve's previous survey, economists had foreseen an annualised decline of just 1.1 percent in first quarter US gross domestic product.
The pain is now expected to last longer than before. The economy was seen shrinking an additional 1.8 percent in the second quarter, bringing the jobless rate to 8.3 percent. Previously forecasters believed GDP might eke out some growth in that quarter, about 0.8 percent. A separate measure of US future economic growth slipped further along with its annualised growth rate in the latest week, indicating a hazy reading of economic recovery, according to the Economic Cycle Research Institute research group.