WSJ.com Economic Forecasting Survey Shows Road to Recovery - WSJ.com

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By PHIL IZZO

The worst recession since the Great Depression has left a scorched landscape that will weigh on the labor market and the broader economy for years to come, according to economists in the latest Wall Street Journal forecasting survey.

The 48 surveyed economists expect the economy to bounce back from four quarters of contraction with 3.1% growth in gross domestic product at a seasonally adjusted annual rate in the just-ended third quarter.

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Expansion is seen continuing through the first half of 2010, though at a slower rate. But the massive downturn means the labor market will take years to heal. On average, the economists don't expect unemployment to fall below 6% until 2013; unemployment hit 9.8% in September.

"Never before has business shed so many workers so fast, so many people failed to find work who are looking for work, and so many dropped out of the labor force as in the current circumstance," said Allen Sinai at Decision Economics.

The labor market's tough road was underscored by Thursday's report on weekly applications for unemployment insurance. The Labor Department reported that initial claims fell 33,000 to 521,000 in the week ended Oct. 3. The number of people collecting unemployment insurance also fell, but remained above six million.

About the Survey

The Wall Street Journal surveys a group of 52 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted every month. Once a year, economists are ranked on how well their forecasts have fared. For prior installments of the surveys, see: WSJ.com/Economist .

The decrease in continuing claims likely reflects people exhausting their unemployment benefits after several months of looking for work in vain.

"We expect the improvement to remain a very slow one, and therefore for the household sector to be contending with a weak labor market for quite some time," Joshua Shapiro, chief U.S. economist with research firm MFR Inc., wrote in a note to clients.

On average the economists -- not all of whom answered every question -- expect the unemployment rate to peak at 10.2% in February. But even once the employment situation stops getting worse, economists expect recovery to come slowly. "It could take until 2014-15 before we see a 5% handle on unemployment again," said Diane Swonk at Mesirow Financial. Persistently high unemployment could prove a political hot potato not only for the 2010 midterm elections for Congress but also for the 2012 presidential election.

Bloomberg News

A job seeker fills out an application last week in Raleigh, N.C. Economists expect the unemployment rate to keep rising.

Senate Democrats on Thursday said they reached a deal to extend unemployment-insurance benefits to the nearly 2 million jobless workers in danger of running out of assistance by year's end. The agreement would give an additional 14 weeks of benefits to jobless workers in all 50 states. Workers in states with an unemployment rate at 8.5% or above would receive six weeks on top of that.

Democrats said they could try to bring the measure to a quick vote on the Senate floor Thursday evening, depending on whether Republicans demand more extended debate.

While nine of the 46 economists who answered a question on the subject supported tax cuts for employers and seven backed tax incentives for hiring, nearly a third said the government shouldn't do anything. Just four said the government should boost spending.

"It's time to let the business cycle take over," said Stephen Stanley of RBS.

The existing $787 billion stimulus has raised concerns about the deficit, with almost three-quarters of respondents saying taxes will have to be raised on those making less than $250,000 at some point in the next six years.

Meanwhile, the Federal Reserve has to decide when and how to pull back from its interventions in the market and when to raise interest rates from their current level of 0% to 0.25%. The economists don't expect the central bank to raise rates at all until sometime around August 2010 amid continued high unemployment.

Some economists worry the economy will turn down again over the next 12 months, leading to a so-called double-dip recession.

—Conor Dougherty contributed to this article.

Write to Phil Izzo at philip.izzo@wsj.com