US recession forecast to drag on

The US economic is set to continue to shrink in 2009

The US recession is likely to drag on well into 2009 with a "moderate recovery" in 2010, according to forecasts from the US Federal Reserve.

The minutes from the central bank's December interest rate meeting show that policymakers were faced with a grim economic forecast.

They were told the economy was expected to shrink more rapidly in the first half of 2009 than had been thought.

At the meeting the Fed slashed its interest rates to near zero.

The minutes from the December meeting of the Federal Reserve's interest rates committee show that rates were expected to be "exceptionally low" for "some time".

'Economic contraction'

In a report to the committee, Federal Reserve staff "revised down sharply" their outlook for economic activity in 2009 "but continued to project a moderate recovery in 2010".

The housing market, where the economic crisis began, "was expected to contract further," the report to committee members stated.

"All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year," according to the minutes.

The economy is really not receiving any support from any cylinders of the engine Kevin Flanagan, Morgan Stanley

The minutes came from a meeting where policymakers lowered the target federal funds rate from 1.0% - already at an historic low - to a range of zero to 0.25%.

The interest rates committee acknowledged that rate cuts appeared to have run their course and that the central bank "would need to focus on other tools to impart additional monetary stimulus to the economy in the near term."

Meanwhile, US factory orders fell for the fourth month in a row in November, down 4.6%.

The drop was steeper than had been expected.

It was the first time that factory orders had fallen for four months in a row since 1992.

Sales fall

Similar figures from the US housing and services sectors suggest the recession is unlikely to end soon.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in November, dropped 4% to 82.3, the lowest since the series started in 2001.

There was more gloom in the services sector, which represents about 80% of the US economy, which shrank for the third month in a row in December.

Though the drop in the services sector was less severe than expected, the Institute for Supply Management's index painted a bleak picture of the job market.

The Institute for Supply Management said its non-manufacturing index came in at 40.6 in December after November's record-low 37.3.

A figure below 50 indicates that the services sector, measured by the index, is contracting.

Economists had expected a reading of 37.0, according to the median of 56 forecasts in a Reuters poll.

"We are in the throes of the worst recession since the early 1980s," said Kevin Flanagan of Morgan Stanley in New York.

"Factory orders are getting hit again. The economy is really not receiving any support from any cylinders of the engine. Pending home sales are down much more than expected as well."