How Long Will It Last?

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Hardly anyone bothers to deny it. After a record eight years of peacetime economic expansion, the most widely predicted recession in recent U.S. history is finally at hand. No longer confined to the beaten-down Northeast, the slump has brought hard times for many Americans, ranging from Boston bankers to Atlanta autoworkers to California aerospace engineers. The big questions now: How far will the economy slide into misery, and how long will the slump last?

The tidings will probably be grim at least until the middle of next year, according to the consensus of a panel of five leading economists who gathered in Manhattan this month for a TIME economic forum. "We have a moderate, potentially severe recession on our hands," said Allen Sinai, chief economist for the Boston Co. Economic Advisers. "The economy is showing signs of caving in, almost falling off a cliff, as so often is the case once a full-fledged recession begins." If the conditions seem particularly bleak, he noted, "that is because we are in the heart of the slide."

The U.S. gross national product will shrink at an annual rate of 2.5%, after adjusting for inflation, in the fourth quarter, and show smaller declines in the first half of next year, according to TIME's panel. (The economy grew at an anemic 1.4% rate in the July-September quarter.) The downturn would meet the official definition of a recession, which is at least two straight quarters of falling GNP. The panel said the U.S. appeared likely to resume slow growth by mid-1991 as the Federal Reserve Board lowers interest rates to stimulate business activity. That scenario would amount to a far milder recession than the severe 1981-82 downturn, which lasted 16 months.

But that is if everything goes well, which is no sure thing. The economists in the TIME forum warned that the U.S. faces a minefield of unprecedented risks that could worsen the recession and prolong it through next year and beyond. Chief among them is the threat of a drawn-out war in the Persian Gulf. That could push the price of oil, which closed at $25.92 per bbl. last week, well past the $41.40-per-bbl. peak that it hit in October. Another serious threat is the possibility of a crisis in the U.S. banking system, which is awash in bad loans and increasingly reluctant to lend more money. L. William Seidman, chairman of the Federal Deposit Insurance Corporation, told Congress last week that 1991 is likely to bring the failure of 180 banks with total assets of $70 billion. That would reduce the FDIC fund, which insures bank deposits, from an already weak $9 billion to $4 billion by the end of next year. Seidman urged lawmakers to levy a special $25 billion assessment on banks and raise their insurance premiums to rescue the fund.

The U.S. economy is also especially vulnerable to shock waves from overseas. A panic in Japan's superheated real estate market would shake Japanese lenders and help trigger a global slump. So could the chaos that would ensue if the Soviet Union's restive republics plunge that country into civil war.