WASHINGTON - THE Federal Reserve warned on Wednesday that the crippled US economy is even worse than thought and predicted it would deteriorate throughout 2009, with no sign that the housing market will stabilise. The Fed's bleak estimates indicated that unemployment could climb as high as 8.8 per cent this year and that the economy would contract for a full calendar year for the first time since 1991.
The central bank's latest projections came hours after a separate report showed that new home construction and applications for future projects both fell to record lows last month.
Still, some economists saw a silver lining in the otherwise dismal housing report: Scaled-back building should reduce the number of unsold homes and contribute to an eventual housing recovery.
The reports raise the stakes for the plan President Barack Obama announced Wednesday to curb foreclosures and ease the broader US housing slump that sent the economy into recession.
The Fed's latest forecast says the unemployment rate will climb to between 8.5 and 8.8 per cent this year. The old prediction, issued in mid-November, estimated that the jobless rate would rise to between 7.1 and 7.6 per cent.
Many private economists believe the current 7.6 per cent jobless rate - the highest in more than 16 years - will hit at least 9 per cent by early next year even with the US$787 (S$1.2 trillion) billion stimulus package signed into law on Tuesday by Obama.
The Fed also believes the economy will contract this year between 0.5 and 1.3 per cent. The old forecast said the economy could shrink by 0.2 per cent or expand by 1.1 per cent.
The last time the economy registered a contraction for a full year was in 1991, by 0.2 per cent. If the Fed's new predictions prove correct, it would mark the weakest showing since a 1.9 per cent drop in 1982, when the country had suffered through a severe recession.
The grim outlook represents the growing toll of the worst housing, credit and financial crises since the 1930s. All of 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 economic outlook.
In another sign of the troubled economy, production at the nation's factories, mines and utilities fell 1.8 per cent last month, more than economists expected. That figure, the third monthly drop in a row, was dragged down by a 23 per cent drop in production at auto plants and their suppliers.
Meanwhile, construction of new homes and apartments plummeted 16.8 per cent in January from the previous month, the Commerce Department said, falling to a seasonally adjusted annual rate of 466,000 units, a record low. Analysts expected a pace of 530,000 housing units.
Building permits, a measure of future activity, also sank to a record low pace of 521,000 units in January, a 4.8 per cent drop from the prior month.
'Conditions in the market for new homes have not been this bad since the 1930s, and they continue to worsen,' said Patrick Newport, an economist at IHS Global Insight in Lexington, Mass. He predicted that housing starts would remain depressed for months to come.
Under the Fed's new projections, the economy should grow between 2.5 and 3.3 per cent next year and by as much as 5 per cent in 2011, which would be considered robust.