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US heading into recession, outlook weak: IMF

WASHINGTON - The United States is headed into a recession this year as the economy yields to a deep housing slump that will bring an unprecedented drop in home prices, the International Monetary Fund said on Wednesday.

“The baseline projections envisage that the economy will tip into modest recession in 2008, followed by a gradual recovery starting in 2009 that will be somewhat slower than that following the 2001 recession,” the IMF said in a downbeat assessment of U.S. prospects this year and next.

It said growth in U.S. national economic output will skid from a subpar 2.2 percent in 2007 to barely 0.5 percent in 2008 and 0.6 percent in 2009.

The IMF forecasts are strikingly more gloomy than projections contained in the Bush administration’s budget report report issued early this year.

In February, the White House put 2008 growth at 2.7 percent and 2009 growth at 3.1 percent. While it conceded on Friday that economic activity in the first quarter would be flat, it said it still thought growth would pick up later this year.

The IMF said a downturn in the U.S. housing sector continues “full blast,” sapping consumer spending and business investment. In addition, costlier imported oil was keeping inflation near 2 percent, which is considered the outer range of the “comfort zone” for Federal Reserve policy-makers.

“The one area of strength has been net exports, which have grown in response to the dollar’s sustained depreciation and the sluggishness of the U.S. economy relative to its trading partners,” the IMF said.

The bleak outlook for the housing sector casts a shadow over the whole economy, with the IMF warning that defaults and foreclosures on homes will keep rising and create a cycle in which falling house prices create incentives to default.

“Reflecting these concerns, the baseline scenario for the U.S. economy assumes a 14-22 percent drop in house prices during 2007-2008 -- unprecedented for the United States, although not elsewhere,” the IMF said.

It predicted “sickly” domestic demand during 2008 in which residential investment will drop, consumer spending fall and labor markets soften while businesses trim investment despite tax credits offered in a recent fiscal stimulus package.

The IMF said the Fed may need to keep lowering official interest rates “for some time” if the U.S. downturn persists. The U.S. central bank already has lowered its trend-setting federal funds rate by 3 full percentage points since mid-September to 2.25 percent, a level reached on March 18.

“Fiscal policy should also be used to provide valuable support for a faltering economy after several years of consolidation,” the IMF said, adding that public support for housing and financial markets should be considered.

“Further initiatives could be considered to facilitate mortgage refinancing in the face of house price declines, including through the judicious use of public funds,” the IMF said, suggesting that might reduce risks that rising foreclosures will lead to even bigger drops in house prices.

The Bush administration so far has adamantly opposed committing public funds to help ease the housing crisis, instead having the Treasury broker agreement among lenders to temporarily freeze some mortgage payments and help stressed homeowners renegotiate their loans to avoid foreclosure.