Federal Reserve downgrades economic outlook for 2009

WASHINGTON —  The Federal Reserve on Wednesday sharply downgraded its projections for the country’s economic performance this year, predicting the economy would shrink and unemployment would rise higher.

Under the new projections, the unemployment rate will rise to between 8.5% and 8.8% this year. The old forecasts, issued in mid-November, predicted the jobless rate would rise to between 7.1 and 7.6%.

Many private economists believe the jobless rate -- currently at 7.6%, the highest in more than 16 years -- will hit at least 9% by early next year even with the $787-billion stimulus package signed into law Tuesday by President Obama.

The Fed also believes the economy will contract this year between 0.5% and 1.3%. The old forecast had the economy shrinking 0.2% or expanding 1.1%.

The last time the economy registered a contraction for a full year was 1991, by 0.2%. If the Fed’s new predictions prove correct, it would mark the weakest showing since a 1.9% drop in 1982, when the country suffered a severe recession.

The bleaker outlook represents the growing toll of the worst housing, credit and financial crises since the 1930s. Those negative forces have plunged the nation into a recession, now in its second year.

“Given the strength of the forces currently weighing on the economy,” Fed officials “generally expected that the recovery would be unusually gradual and prolonged,” according to documents on the Fed’s updated outlook.

Against that backdrop, unemployment will keep climbing and stay elevated for quite some time, the Fed predicted.

The Fed forecast calls for the jobless rate to dip to between 8% and 8.3% next year, and between 7.5% and 6.7% in 2011. All those projections are worse than the Fed’s previous estimates and would put unemployment higher than the normal range of about 5%.

Under the Fed’s new projections, the economy should grow between 2.5% and 3.3% next year. Fed officials “generally expected that strains in financial markets would ebb only slowly and hence that the pace of recovery in 2010 would be damped,” according to the Fed documents.

In other economic news Wednesday, big industry production throttled back in January partly because of auto shutdowns, and housing construction tumbled to a record low, weaker-than-expected performances that show the country caught in a worsening economic tailspin.

The Federal Reserve reported that production at the nation’s factories, mines and utilities fell 1.8% last month. Many economists expected a 1.5% decline. It marked the third straight down month, and December’s performance was even weaker than initially reported, plunging 2.4%.

Another report from the Commerce Department said construction of homes and apartments plummeted 16.8% in January from the previous month to a seasonally adjusted annual rate of 466,000 units, a record low. Analysts expected a pace of 530,000 housing units.