Recession Seen Lasting Through 2009

There is light at the end of the recession tunnel, but the economy won’t see it until the end of 2009, and even then it might be dimly lit, according to an economic panel assembled by Prudential Financial.

The U.S. economy is 14 months into a recession that could last for the better part of 2009 before there is some recovery, a rebound that “will be tepid by historical standards, according to panelist Edward Campbell, a vice president and portfolio manager with Quantitative Management Associates, a unit of Prudential.
The reason, he explained, is because of the scope of the deleveraging that the economy still needs to undergo in spite of the tremendous stimulus that the government has already given the economy.

In order for the equity markets to rebound, the credit markets will also have to settle, Mr. Campbell said.

Tight credit markets and a deep recession that caused declines in a broad range of investments pared $30 trillion in paper wealth from investors, he said during the panel discussion.

Four anticipated consecutive quarters of GDP decline, including a 6-to-7 percent drop in fourth-quarter 2008 and a possible 5 percent decline in first-quarter 2009, speak to the depth of the recession, he added.

In spite of the severity of the downturn, don’t look for a repeat of the 1930s and the Great Depression or a “Japanese style loss of a decade” that occurred in the 1990s when the Japanese experienced protracted deflation, according to Mr. Campbell.

The reason, he said, was because government took a wide range of steps including dropping interest rates to near zero percent, “running the printing presses” and making currency available, and lending to the private sector.

Even so, the impact was felt in the way that participants in 401(k) plans handled contributions and withdrawals, according to James Cornell, senior vice president and chief marketing officer with Prudential Retirement, a unit of Prudential Financial.

Mr. Cornell cited an AARP, Washington, report that because of the economy, 20 percent of respondents had stopped contributing to retirement accounts and that hardship withdrawals and loans against plans are increasing.

Prudential found that the number of hardship withdrawals from DC participants increased 45 percent compared with numbers recorded in 2007, he said.

But, Mr. Cornell continued, in the last four months of 2008, hardship withdrawals decreased and logins for economic calculators were 108,000—a 28 percent increase over 2007. Those calculator visits, he said, resulted in increases in contributions that were, on average, 4.2 percent.

While hardship withdrawals are down, that number tracks unemployment statistics and could increase if unemployment grows in the first part of 2009, he confirmed.

Mr.Cornell also expressed concern that some companies are suspending matching of contributions from their employees, saying that it will especially hurt new participants and new hires who might decide not to contribute.

Edward Keon, managing director and portfolio manager with Quantitative Management Associates, agreed with Mr. Campbell that the government had taken steps to “avoid disaster” but that going forward balance will need to be restored in several areas.

In the near term, the government had to address the financial crisis, he said. “If the house is burning, you don’t worry about water damage to the furniture.”

But going forward, it would be better if the savings rate grew at a steady rate rather than experiencing a sudden jump because of the potential for a parallel drop in consumption and gross domestic product, he explained.

Balance is also needed in weighing risk and safety because too much emphasis on safety will stifle the economy and prevent it from growing and flourishing, Mr. Keon said.