Amid the daily deluge of gloomy financial news, some local economists say there are signs that the economy may start to recover as early as the middle of next year if home prices in Utah stabilize, and if the Treasury and Federal Reserve's monetary policies start to work to unfreeze the credit markets.

"This recession is severe enough to go twice as long as normal recessions, which typically average nine to 10 months in duration. We're already in the 12th month of recession, which means it may end around June 2009 at the earliest," said Sterling Jensen, regional managing director for Wells Capital Management.

In delivering Wells Fargo's 2009 Utah economic forecast to more than 100 business and government representatives on Friday, Jensen tried to put into perspective the magnitude of the current recession, which he said is similar to but not as bad as the recession from 1981-82.

"It felt a lot worse in the '80s when [national] unemployment was over 10 percent, compared with 6.7 percent today. Back then, inflation was over 12 percent, but now inflation is negative because of the collapse in commodity prices," Jensen said.

Pessimism bubble

"We've been through the dot.com and housing bubble, the oil and commodity price bubble. We're in a bubble of pessimism right now," he said. "But have we gone too far in being pessimisticfi Perhaps because it has been so long since a real recession most investors just forgot what the experience is like and are over-reacting. Eventually investors will get used to the headlines and stop reacting."

While the relentless barrage of bad economic readings has weighed on the markets in the past few months, investors are growing somewhat accustomed to the news. The stock market, which generally looks ahead, tends to recover six to nine months before economic reports show a recession is abating, Jensen said. At some point, investors likely will determine that a recession has been fully built into the market's expectations and will begin placing bets on a recovery.

Case in point, Jensen pointed to Wall Street's upbeat spin Friday despite the Labor Department's report that the nation lost more than 533,000 jobs in November, well above the 320,000 that economists forecasted. Stocks reversed early losses and closed nearly 260 points higher as the data raised hopes that the government will again step in to help the economy.

Housing market must stabilize

Key to the economy's recovery is that of the housing market's stabilization, said Wells Fargo executive vice president and senior economist Kelly Matthews.

He sees home prices in Utah bottoming out by the first quarter of 2009 as demand, fueled by low mortgage rates, is expected to pick up in spring.

Already there are signs that a housing recovery in Utah County is underway, with 1,100 home sales recorded in the third quarter, down just 1 percent from a year ago, Matthews said, citing data from the Salt Lake Board of Realtors. That compares with a 26 percent drop in home sales year-on-year in the second quarter, a 40 percent drop in home sales year-on-year in the first quarter, and a 46 percent drop in home sales year-on-year in the fourth quarter 2007.

He attributed the pickup in home sales in the third quarter to the Federal Reserve's aggressive moves in the past year to lower its key overnight lending rate, now at 1 percent, from 5.25 percent.

In fact, the unprecedented sharp drop in interest rates is prompting Matthews to revise his housing affordability analysis in Utah. Earlier this year Matthews said home prices would have to drop about 20 percent to restore affordability because wage growth hasn't kept pace with price gains in recent years, paychecks weren't stretching as far because of then skyrocketing gas and food prices, and interest rates weren't likely to drop further because of inflation concerns at the time.

Since then, interest rates have plunged, and the average home price in Utah County has shed nearly 10 percent to $273,711 in the third quarter from a year ago, while median prices dropped 5 percent to $230,267 in the same period.

"If we can hold mortgage rates at current levels of 5.5 percent or lower, that's a 1 percentage point drop from 6.5 percent a year ago. And a one percentage point drop in mortgage rates is equivalent to having a 10 percent reduction in home prices, then maybe we are already achieving affordability now," he said.

"We're still creating households through our natural population growth, even though net in-migration has dropped. If we can get the inventory overhang sold, then we can get the building industry restarted again. We're going to have to build more homes at some point," Matthews said.

But Utah's employment situation continues to weigh on the economy. Utah may lose up to 16,000 jobs by the first half of 2009 as fallout from the housing slump and financial meltdown spreads into non-residential construction and other sectors, Matthews said. That's almost double the number of jobs lost in the most recent recession in 2001-2002, when Utah lost 7,820 jobs.

Nationally and in Utah, the foreclosure problem has been aggravated by job losses. Yet, Jensen downplayed concerns that foreclosures in Utah could spike up significantly in the next two years from the number of adjustable-rate mortgages that are scheduled to reset in 2009 and 2010 -- which are expected to cause these borrowers' monthly payments to rise -- and many of them aren't expected to be able to qualify for new loans under now stringent lending standards.

While Jensen sees foreclosures in Utah rising, he believes the magnitude of the problem will likely be mitigated by the sharp drop in interest rates in the past year.

"Interest rates have dropped so much that those resets will be non-issues. And that's part of the cure," he said. "A year ago, when the prime rate was at 8 percent, those ARMs were expected to reset at 10 percent. Now that the prime rate has dropped to 4 percent, those ARMS would likely be resetting at around 6 percent. Any mortgage with a variable rate will likely be reset at lower rates, because interest rates have come down so much."

Reviving the economy

The Federal Reserve and the Treasury have been taking unprecedented steps to revive the economy since the mid-September bankruptcy of Lehman Brothers Holdings Inc. The biggest move was the government's $700 billion rescue for the financial industry. The Treasury said Thursday it is considering a plan to encourage banks to make mortgage loans at low rates; that could help patch up the troubled housing market, which many analysts say is crucial to any economic recovery.

That's why the Fed, which is likely to cut the overnight bank lending rate by another half percentage point to an almost unbelievable 0.5 percent on Dec. 16, is also expanding its balance sheet so that it can lend more and purchase commercial paper and other debt.

The central bank can also buy longer-term debt in order to lower interest rates on everything from car loans and student loans to mortgages. That's the intention of the Fed's just announced plan to buy $600 billion in debt and mortgage-backed securities from mortgage giants Fannie Mae and Freddie Mac.

Since that was announced in late November, the average rates on 30-year fixed mortgages have fallen to 5.6 percent Friday from 6.33 percent the week before news of the plan came out, according to Bankrate.com. That drop has fueled a surge in mortgage applications, which more than doubled in volume during Thanksgiving week, according to the Mortgage Bankers Association.

At the same time, the Treasury Department is considering a proposal to lower rates further on newly originated 30-year fixed mortgages, to 4.5 percent, by purchasing mortgage-backed securities.

On top of that, President-elect Barack Obama is gearing up for a large fiscal stimulus package, which could total about $550 billion over three years for such things as infrastructure, support for state and local governments and tax cuts, according to Nigel Gault, chief U.S. economist at IHS Global Insight.

The aim of these unconventional tactics is to prevent the economic crisis that some are now calling the "Great Recession" from spiraling into another Great Depression.

At 12 months and counting, this recession is longer than the 10-month average length of recessions since World War II. The record for the longest recession in the postwar period is 16 months, which was reached in the 1973-75 and 1981-82 downturns. The current recession might end up matching that or setting a record in terms of duration, analysts say.

The 1981-82 recession was the worst in terms of unemployment since the Great Depression. The jobless rate rose as high as 10.8 percent in late 1982, just as the recession ended, before inching down.

Given the current woes, the jobless rate could rise to as high as 8.5 percent by the end of next year, some analysts predict. Projections, however, have to be taken with a grain of salt because all of the uncertainties plaguing the economy.

• The Associated Press contributed to the report.