The U.S. economy has slipped into deflation, which threatens to prolong and worsen the recession, according to BCA Research.

“The U.S. economy has dropped at the steepest pace in memory since the late summer, and leading indicators warn that further weakness looms,” it observes in a research note, adding that the fourth quarter GDP report confirmed that nominal GDP growth was negative.

“The authorities moved too slowly in 2007-2008, and a self-reinforcing collapse has taken hold, as weak demand is fueling unemployment,” BCA says. “The secular pattern of descending peaks and troughs in the unemployment rate has reversed. This has crushed job security and will sustain the pressure to lift household savings to the detriment of consumption.”

“At a minimum, it will be a long road out of recession, even if conditions start to stabilize by mid-year, which implies deflation pressures will persist,” it concludes. “The backdrop for the financial markets will remain poor if deflation cannot be reversed.”

IE