U.S. Heading for Slump, With or Without Bailout

The U.S. may face its longest recession in a quarter century no matter what action Congress takes on Treasury Secretary Henry Paulson’s $700 billion plan to rescue the battered banking industry.

Economists including Joseph Lavorgna of Deutsche Bank Securities and David Greenlaw of Morgan Stanley said it now appears the economy shrank in the third quarter as credit- crimped consumers cut spending for the first time since 1991. A further contraction is likely in the next two quarters, some economists predicted, which would make the recession the longest since 1981-82.

“This has been a body blow to consumer and business confidence,” said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania. “The next six months are going to be very difficult.”

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How bad it gets depends on whether Congress passes some form of assistance for the banks. The Standard & Poor’s 500 index plunged 8.8 percent yesterday, its biggest fall since 1987, after the House of Representatives rejected the rescue package. The stock-market rout wiped out a record $1.3 trillion of wealth.

The defeat of the measure — and the steep price decline that accompanied it — set off a scramble among the plan’s backers for additional support before another vote, which likely won’t come until later in the week.

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