Timely Fiscal Stimulus Is Needed to Keep Economy Afloat
The as-yet unofficial economic recession is deepening as we roll through the fourth quarter, and downward economic momentum undoubtedly will extend into the early part of 2009. It now appears that the current recession will be the most serious one since the early 1980s, and it could turn out to be even worse than that if policymakers fail to react effectively.

In the third quarter of 2008, real gross domestic product (GDP) contracted at a 0.3% rate, according to the Commerce Department’s “advance” estimate. Although this is a smaller decline than NAHB had originally projected, key monthly data released since then point toward a sizeable downward revision to the advance estimate, and it’s clear that economic activity was weakening progressively during the quarter—setting up weak “initial conditions” for the fourth quarter of the year.

NAHB now projects that real GDP will contract by about 3.8% in the fourth quarter, and there are downside risks even to that projection. NAHB also projects that the economy will regain its footing during the second half of next year, aided by further declines in commodity prices (including oil), lagged effects of massive monetary stimulus from the Federal Reserve and foreign central banks, and substantial fiscal stimulus from Congress and the new administration. NAHB anticipates further reductions in key policy rates at home and abroad.

In the U.S., NAHB expects that the Fed will drop the target federal funds rate from 1% to 0.5% at the Dec. 16 meeting of the Federal Open Market Committee, and the discount rate should be cut by the same amount. NAHB also expects the Fed to hold this highly stimulative monetary policy stance throughout 2009.

The lagged effects of monetary stimulus are bound to gain traction during 2009, helping to limit the depth and duration of the recession. But the Fed definitely cannot stabilize the economy on its own, as monetary policy can prove to have little immediate kick when depository institutions are afraid to lend, even to each other, and consumers and businesses don’t want to borrow and spend.  Unfortunately, that seems to characterize the current situation in the U.S. and many other parts of the world at this time. Timely fiscal stimulus now is absolutely essential to prevent a downward economic spiral next year. [ return to top ]