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Bruised US economy likely to limp into next year

(Agencies)
Updated: 2008-10-20 18:47

WASHINGTON -- Beaten down by housing, credit and financial crises, the bruised US economy is likely to drag into next year, leaving more people out of work and more businesses wary of making big investments.

Treasury Secretary Henry M. Paulson, Jr., walks to a motorcade after arriving with President Bush and first lady Laura Bush via the Marine One helicopter at the Naval Observatory, Sunday, Oct. 19, 2008, in Washington. [Agencies]

Federal Reserve Chairman Ben Bernanke, scheduled to appear Monday before the House Budget Committee, is likely to once again put the country on notice that there won't be a quick fix.

Even if the turmoil gripping Wall Street were to let up and badly shaken confidence in the banking system fully restored, a "broader economic recovery will not happen right away," Bernanke warned last week. "Economic activity will fall short of potential for a time," he said.

The Fed chief has left the door open for further interest rate reductions to provide some relief.

Dropping rates might induce consumers and businesses to stop burrowing and instead boost their spending, an important ingredient to energize overall economic activity.

So far, though, a string of drastic actions by the Federal Reserve and the Bush administration has yet to turn around a bunker mentality. Banks are fearful of lending money to each other and to their customers. Businesses are reluctant to hire and boost capital investments. Consumers have hunkered down. All the economy's problems are feeding off each other, creating a vicious cycle that Washington policymakers are finding difficult to break.

President Bush has repeatedly asked Americans to be patient and give the government's relief efforts time to work. Democrats on Capitol Hill, however, insist another round of economic stimulus is needed.

Related readings:  Bush to announce new details of bank rescue plan  Obama outlines economic rescue plan  Wall Street soars 11 percent on bank rescue and Morgan deal  US summons banks to meeting on rescue plan

Unemployment could hit 7.5 percent or higher by next year. Many analysts predict the economy will shrink later this year and early next year, meeting the classic definition of a recession. Some believe the economy already jolted into reverse during the July-to-September quarter.

One of the president's chief economic advisers said Sunday that parts of the country probably already are experiencing a recession, and it could take a few months before the clogged credit system starts working again.

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