Economist: Recession likely to continue through '09

VIRGINIA BEACH

Consumers stand to benefit from a further decline in oil prices, but tight credit and a deteriorating job market will hamper their ability to spend in the coming year, an economist with Wachovia Corp. said Wednesday.

The nation is already in a recession, and a recovery isn't likely to begin until next year's second half, Mark Vitner, a senior economist at the Charlotte, N.C.-based parent of Wachovia Bank, told a luncheon gathering of the Central Business District Association of Virginia Beach.

"I'm concerned that this is going to be a relatively long economic downturn" that matches the recession of the early 1980s, he said afterward.

Many households are already having a difficult time covering basic expenses, leaving less for purchases of flat-screen TVs and other optional items, Vitner told about 160 people at the luncheon. Four categories - food, energy, housing and health care - together account for 56 percent of spending by the nation's middle-class households, he said.

As the U.S. economy loses steam, the nation's jobless rate probably will climb to 9 percent and might hit 10 percent next year, Vitner said. The rate last month was 6.5 percent.

In Hampton Roads, where the concentration of military activity provides some economic stability, the jobless rate will rise to between 6 and 6.5 percent next year, Vitner predicted. The region's unemployment rate was 4.3 percent in September. The rate for October has not yet been reported.

Because the slowdown has spread throughout the world, oil prices could fall as low as $8 a barrel and are likely to remain depressed for three to five years, Vitner said during his talk at the Westin Virginia Beach Town Center hotel.

However, the availability of credit for consumers and businesses remains tight, he said. One key measure - the spread between the rate for three-month Treasury bills and the rate that international banks charge each other for overnight loans - has narrowed from its extraordinary spike in September.

This spread "has come down, but it's a little premature to say all is well" in the credit markets, said Vitner, who noted that the spread between the rate for a 30-year, conventional mortgage and the rate for the benchmark 10-year Treasury note remains wider than is historically the case.

The downturn in home sales, coupled with the scarcity of credit, will force more homebuilders to restructure their debts in bankruptcy court, Vitner predicted.

Meanwhile, an important source of financing for commercial real estate, the market for commercial mortgage-backed securities, still isn't functioning, he said, and may take four or five years to recover.

Vitner endorsed the Treasury Department's program for providing capital to financial institutions but called attention to the way the Treasury changed its strategy and dropped plans for buying illiquid mortgage securities. "I don't disagree with what they did, but they should have been more forthright with us," he said.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com