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US facing worst recession since WWII, expert warns

Harvard University economist Martin Feldstein, a member of the group that dates business cycles in the US, said the nation has entered a recession that could be the worst since World War II.

"I believe the US economy is now in recession," Feldstein, president of the National Bureau of Economic Research (NBER), told the Futures Industry Association conference in Boca Raton, Florida.

"Could this become the worst recession we have seen in the postwar period? I think the answer is yes," Feldstein said.

"I would emphasize the word `could,'" he said.

Feldstein's remarks represent the first time that a member of the NBER's business-cycle dating committee has publicly described the current downturn as a recession. The economy may not respond quickly to US Federal Reserve interest-rate cuts, and a package of tax rebates and investment incentives will offer only a temporary boost, he said.

"By almost every measure the US economy is moving sideways or slightly down for the last few months," said Feldstein, who in January put the odds of a recession at more than 50 percent.

The collapse of the market for subprime loans, those given to borrowers with the weakest credit, has cost global financial companies US$195 billion in asset write-downs and credit losses since the beginning of last year. The losses have caused liquidity in financial markets to dry up.

"Monetary policy is not likely to have the favorable traction in this slowdown that it has had in the past, in part because of what is happening in housing and in credit markets," said Feldstein, who is retiring as NBER president this year.

A fiscal-stimulus package will help growth in the second half of the year, though that is "not very likely to do more than cause a pause" in the downturn, he said.

Committee members say any formal determination of a recession may still be months away, in part because economic data is frequently revised.

Feldstein said that while some data may be updated, it is "very likely" that reports will confirm a recession this year.
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