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Group forecasts deeper recession, with turnaround in late '09, solid recovery in 2010.

NEW YORK (CNNMoney.com) — A survey of leading economists finds them now forecasting a far deeper and more painful recession ahead in the first half of the year, but a modest pickup in the second half of 2009, followed by a solid recovery in 2010.

“The steady drumbeat of weak economic and financial market data have made business economists decidedly more pessimistic on the economic outlook for the next several quarters,” said Chris Varvares, the president of the National Association of Business Economics, which conducted the survey of 47 top forecasters in late January and early February.

“While a few reports offer some glimmer of hope, a meaningful recovery is not expected to take hold until next year,” added Varvares, who is also president of the research firm Macroeconomic Advisors.

The forecasts hold little good news for the first half of this year. The economy is expected to decline at a 5% rate in the first quarter, even sharper than the 3.8% drop recorded in the fourth quarter of last year. And the group is forecasting another 1.7% drop in economic activity in the second quarter.

While the economists surveyed are forecasting a 1.6% gain in economic activity the second half of this year, that won’t be enough to overcome the first half weakness, which should result in a 0.9% full-year drop in U.S. economic activity when comparing the fourth quarter of this year to a year earlier. That would be the biggest drop on that basis since 1982, and far worse than the year-over-year decline of 0.2% recorded in the fourth quarter of 2008.

As recently as NABE’s November survey, the consensus of economists was that there would be 0.7% economic growth during the course of 2009. Last May’s survey found the group forecasting a healthy gain of 2.7% during the year.

But the outlook for this year has clearly gotten much worse since the earlier surveys in just about every measure. The economists are forecasting unemployment rising to 9% for the fourth quarter of 2009, up from their previous 7.5% estimate.

They expect job losses for the year coming in roughly the same as the nearly 3 million jobs lost in 2008, which is nearly four times the job losses they were forecasting three months ago.

They also estimate corporate profits will slip 9% this year, while housing starts and auto sales continue to fall to levels not seen in decades. All those forecasts are significantly worse than estimates in the November survey.

The economy should see a healthy 3.1% growth during the course of 2010

The economists are forecasting a healthy recovery in stocks from current levels, estimating the Standard & Poor’s 500 will end the year a 975, which would be 26% above current levels and a gain of 8% from where it started the year. But in November the economists had forecast the S&P would end 2009 at 1,200.

Still, the optimism that the economists had back in November has been pushed back, rather than abandoned. They forecast that the economy will see healthy 3.1% growth during the course of 2010, as they expect unemployment to start to ease as employers add 1.3 million jobs during the year, and auto sales and housing starts at least make it back to 2008 levels. Even the five most pessimistic economists surveyed are forecasting economic growth during every quarter of 2010, although those pessimists expect job losses and the unemployment rate to continue throughout all of next year.

The United States is seen as the most likely major economy to emerge from the global recession first, according to the survey. The survey found 34% expect the U.S. back on its feet first, followed by 28% who believe China would be the first to recover and 13% who picked Canada. Less than 4% picked European economies as the most likely to lead the recovery.

With drug-fueled violence and corruption escalating sharply, many fear drug cartels have grown too powerful for Mexico to control. Why things are getting worse, and what it means for the United States.

Mexican marines stand guard next to about 7 tons of confiscated cocaine on Feb. 16.

Monterrey, Mexico

Detective Ramon Jasso was heading to work in this bustling city a few days ago when an SUV pulled alongside and slowed ominously. Within seconds, gunmen fired 97 bullets at the 37-year-old policeman, killing him instantly.

Mr. Jasso had been warned. The day before, someone called his cellphone and said he would be killed if he didn’t immediately release a young man who had been arrested for organizing a violent protest in support of the city’s drug gangs. The demonstrators were demanding that the Mexican army withdraw from the drug war. The protests have since spread from Monterrey — once a model of order and industry — to five other cities.

Much as Pakistan is fighting for survival against Islamic radicals, Mexico is waging a do-or-die battle with the world’s most powerful drug cartels. Last year, some 6,000 people died in drug-related violence here, more than twice the number killed the previous year. The dead included several dozen who were beheaded, a chilling echo of the scare tactics used by Islamic radicals. Mexican drug gangs even have an unofficial religion: They worship La Santa Muerte, a Mexican version of the Grim Reaper.

In growing parts of the country, drug gangs now extort businesses, setting up a parallel tax system that threatens the government monopoly on raising tax money. In Ciudad Juarez, just across the border from El Paso, Texas, handwritten signs pasted on schools warned teachers to hand over their Christmas bonuses or die. A General Motors distributorship at a midsize Mexican city was extorted for months at a time, according to a high-ranking Mexican official. A GM spokeswoman in Mexico had no comment.

“We are at war,” says Aldo Fasci, a good-looking lawyer who is the top police official for Nuevo Leon state, where Monterrey is the capital. “The gangs have taken over the border, our highways and our cops. And now, with these protests, they are trying to take over our cities

The parallels between Pakistan and Mexico are strong enough that the U.S. military singled them out recently as the two countries where there is a risk the government could suffer a swift and catastrophic collapse, becoming a failed state.

Pakistan is the greater worry because the risk of collapse is higher and because it has nuclear weapons. But Mexico is also scary: It has 100 million people on the southern doorstep of the U.S., meaning any serious instability would flood the U.S. with refugees. Mexico is also the U.S.’s second biggest trading partner.

Mexico’s cartels already have tentacles that stretch across the border. The U.S. Justice Department said recently that Mexican gangs are the “biggest organized crime threat to the United States,” operating in at least 230 cities and towns. Crimes connected to Mexican cartels are spreading across the Southwest. Phoenix had more than 370 kidnapping cases last year, turning it into the kidnapping capital of the U.S. Most of the victims were illegal aliens or linked to the drugs trade.

Former U.S. antidrug czar Barry McCaffrey said Mexico risks becoming a “narco-state” within five years if things don’t improve. Outgoing CIA director Michael Hayden listed Mexico alongside Iran as a possible top challenge for President Obama. Other analysts say the risk is not that the Mexican state collapses, but rather becomes like Russia, a state heavily influenced by mafias.

Such comparisons are probably a stretch — for now anyway. Beyond the headline-grabbing violence, Mexico is stable. It has a thriving democracy, the world’s 13th-largest economy and a growing middle class. And as many as 90% of those killed are believed to be linked to the trade in some way, say officials.

“We have a serious problem. The drug gangs have penetrated many institutions. But we’re not talking about an institutional collapse. That is wrong,” says Attorney General Eduardo Medina Mora.

Officials in both Washington and Mexico City also say the rising violence has a silver lining: It means that after decades of complicity or ignoring the problem, the Mexican government is finally cracking down on the drug cartels and forcing them to fight back or fight with one another for turf. One telling statistic: In the first three years of President Felipe Calderon’s six-year term, Mexico’s army has had 153 clashes with drug gangs. In the six years of his predecessor Vicente Fox’s term, there were only 16.”

If Mexico isn’t a failed state, though, it is a country with a weak state — one the narcos seem to be weakening further.

“The Mexican state is in danger,” says Gerardo Priego, a deputy from Mr. Calderon’s ruling center-right party, known as the PAN. “We are not yet a failed state, but if we don’t take action soon, we will become one very soon.”

Mexican academic Edgardo Buscaglia estimates there are 200 counties in Mexico — some 8% of the total — where drug gangs wield more influence behind the scenes than the authorities. With fearsome arsenals of rocket-propelled grenades, bazookas and automatic weapons, cartels are often better armed than the police and even the soldiers they fight. The number of weapons confiscated last year from drug gangs in Mexico could arm the entire army of El Salvador, by one estimate. Where do most of the weapons come from? The U.S.

Last year alone, gunmen fired shots and threw a grenade, which didn’t explode, at the U.S. consulate in Monterrey. The head of Mexico’s federal police was murdered in a hit ordered by one of his own men, whom officials say was working for the drug cartels. Mexico’s top antidrug prosecutor was arrested and charged with being on a cartel payroll, along with several other senior officials. One man in Tijuana admitted to dissolving some 300 bodies in vats of acid on behalf of a drug gang.  The publisher of Mexico’s most influential newspaper chain moved his family from Monterrey to Texas after he was threatened and gunmen paid a visit to his ranch. Other businessmen from cities across Mexico have done the same.

“I have never seen such a difficult situation” in Mexico, says Alejandro Junco, who publishes Reforma in Mexico City and El Norte in Monterrey. Mr. Junco now commutes every week to Mexico from Texas.

A few weeks ago, a recently retired army general hired to help the resort city of Cancun crack down on drug gangs was tortured and killed. His wrists and ankles were broken during the torture. Federal officials’ main suspect: the Cancun police chief, who has been stripped of his duties and put under house arrest during the investigation.

Every day brings a new horror. In Ciudad Juarez on Friday, gunmen killed a police officer and a prison guard, and left a sign on their bodies saying they would kill one officer every two days until the city police chief resigns. He quit late Friday.

Analysts and diplomats worry that drug traffickers may increase their hold on Mexico’s political process during midterm congressional elections scheduled for July.

Mauricio Fernandez Garza, the scion of a wealthy Monterrey family, says he was approached by a cartel when he was a gubernatorial candidate in 2003 and told the cartel would foot the bill for the campaign if he promised to “look the other way” on the drugs trade. He says he declined the offer. He lost the election.

Mexico has long been in the crosshairs of the drug war. In the 1980s, the drug of choice for local traffickers was marijuana, and much like today, accusations of high-level Mexican corruption were common. In 1985, DEA agent Enrique “Kiki” Camarena was tortured to death by local traffickers, with the aid of a former president’s brother-in-law. In 1997, the country’s antidrug czar Gen. Jesus Gutierrez Rebollo was jailed after it emerged he was in the employ of a powerful trafficker.

Drawn by the opportunity to supply the U.S. drug market, powerful trafficking groups have emerged on Mexico’s Pacific coast, its Gulf coast, in the northern desert state of Chihuahua and in the wild-west state of Sinaloa, home to most of Mexico’s original trafficking families. These groups, notorious for their shifting alliances and backstabbing ways, have fought for years for control of trafficking routes. Personal hatreds have marked fights over market share with barbaric violence.

Several new factors in the past few years added to the violence, however. In 2000, Mexicans voted out the Institutional Revolutionary Party, or PRI, which had ruled for 71 years. The end of a one-party state loosened authoritarian control and broke the old alliances cemented through corruption that kept a check on drug-related violence.

Another factor was 9/11. After the attacks, tighter border security prompted some gangs to sell cocaine in Mexico instead, breaking an unspoken agreement with the government that gangs would be tolerated as long as they didn’t sell the drugs in Mexico but passed them on instead to the gringos. Since 2001, local demand for cocaine has grown an estimated 20% per year. The creation of a local market only encouraged infighting over the spoils.

Things started getting really nasty in 2004, when Osiel Cardenas, then leader of the Gulf Cartel, killed Arturo “the Chicken” Guzman, the brother of Joaquin “Shorty” Guzman, a leader of the Sinaloa cartel. Mr. Guzman soon tried to take over Nuevo Laredo, the border city controlled by Mr. Cardenas with the help of the Zetas, former elite Mexican soldiers who defected to the drug traffickers, as well as most of the Nuevo Laredo police, who in fact worked for the Zetas. The struggle for Nuevo Laredo culminated in a pitched battle when gunmen used rocket-propelled grenades to attack a safe house belonging to the other cartel. The all-out battle led the U.S. to close its consulate for a week. The violence soon spread as the two groups fought for dominance all over Mexico’s northern border.

Monterrey, just a hundred miles to the south, seemed unperturbed. Can-do, confident and modern, Monterrey likes to think of itself as more American than Mexican. It’s the home of Mexico’s best university, Tecnologico de Monterrey, modeled on MIT, as well as the country’s most prosperous suburb, San Pedro Garza Garcia, and local units of 1,500 U.S. companies. Its police are considered among Mexico’s best. In the 1990s, the San Diego Padres came to play a few regular season games here and there was heady talk of Monterrey landing a pro baseball team.

As violence engulfed Nuevo Laredo, Monterrey business leaders, police chiefs and government officials were of one mind: It wouldn’t happen here. “We have drawn a line in the sand and told the drug lords they cross it at their peril,” state governor Natividad Gonzalez said in a 2005 interview.

What the governor apparently didn’t know is that, for years, Monterrey’s relative calm was due to an unspoken agreement between rival drug lords whose families lived quietly in the wealthy San Pedro enclave, a place where their wealth would not be conspicuous, say local police. But Monterrey was too big a local drug market to ignore for both sides, and soon fighting broke out.

By 2006, the murder rate spiked and cops were getting shot at point-blank on the streets. San Pedro Police Chief Hector Ayala was gunned down. Months later, Marcelo Garza y Garza, the chief of state police investigations, a well-known San Pedro resident and the DEA’s main contact in the city, was murdered outside the town’s largest Roman Catholic church. U.S. law-enforcement officials believe he was betrayed to the Zetas by a corrupt cop.

Today, the warring gangs still vie for control, though the Zetas have the upper hand. In much of the city, the gang is branching out into new types of criminal enterprise, especially extorting street vendors, nightclubs and other shops that operate on the margin of the law. These places used to be preyed upon by local cops, but no longer. The owner of a billiards hall says the Zetas told him they wanted a cut of the profits every month, a bill he ponies up. They also ordered him to allow someone to sell drugs at the hall, he says. “What can I do,” he shrugs.

In the street market along the city’s busy Reforma Ave, the Zetas sell pirated CDs, and have their own label: “Los Unicos,” or “The Only Ones,” with a logo of a black horse surrounded by four Zs. In Spanish, “Zeta” is how you pronounce the letter “Z.” One vendor says some Zetas came to the stalls last year and ordered several vendors to start peddling the Zeta label CDs.

Many Monterrey residents are convinced that even a cut from bribes they pay local cops for traffic violations goes to the Zetas through corrupt cops. That kind of extra money to fund the drug gangs only worsens the balance of power between the state and the traffickers. The drugs trade in Mexico generates at least $10 billion in yearly revenues, Mexican officials say. The government’s annual budget for federal law enforcement, not including the army: roughly $1.2 billion.

Both the Zetas and the Sinaloa cartels are believed to field as many as 10,000 gunmen each — the size of a small army. The Zetas, for instance, can find fresh recruits easily in Monterrey’s tough barrios, where the unemployment rate is high.

In Monterrey’s Independencia neighborhood, one of the city’s oldest, it is not the city government that controls the streets but the local pandillas, or gangs. During a recent workday, the streets were filled with young gangsters, sitting around playing marbles, chatting, and looking tough. At the entrance to a local primary school, a group of four men sat and smoked what appeared to be crack cocaine, what locals call “piedra” or rock.

Outsiders are clearly unwelcome. A reporter visiting in an unmarked SUV along with a state policeman wearing civilian clothes was enough to get plenty of hostile stares and a few mouthed expletives. One or two gang members pulled out their cell phones and began placing a call. “They’re unsure whether we’re cops or another drug gang,” said Jorge, the state policeman, who did not want his full name used for fear of retaliation by the drug lords. “Either way, we move on or we’re in trouble.”

Jorge, clean cut and with an infectious smile, has been a state cop for more than 20 years. He earns 6,000 pesos — $450 — a month. It’s an old saw in Mexico that police here don’t make enough money to either resist being corrupted by the criminals or care enough to risk their lives going after them. In fact, corruption extends throughout the police forces. A senior state official said privately that he doesn’t trust a single local police commander.

The state’s former head of public security resigned amid allegations that he was in league with the Sinaloa cartel. The man who took his place is Mr. Fasci, a former top prosecutor. Mr. Fasci says officials are trying to improve coordination among Mexico’s alphabet soup of different law enforcement bodies. In Monterrey’s metropolitan area, there are 11 different municipal police forces, a state police, three branches of the federal police, and the army. Statewide, there are 70 different emergency numbers for the police. Making matters worse, narcotics smuggling is a federal crime, so local cops aren’t supposed to prosecute it.

Mr. Fasci says the protests are organized by drug gangs, who go to barrios like Independencia and pay $30 to each person to block traffic, hold up signs like “no military repression.” Mr. Fasci thinks the gangs are trying to goad the police into a crackdown that would generate antipathy for the authorities and the army. “We’re not going to fall for it,” he says.

Neither will the Mexican government call off the soldiers. Mexico has no choice but to deploy the army to do what corrupt and inefficient state and local police forces can’t, says Mr. Fasci. And the protests are likely a sign the military is having success pressuring the drug gangs, say officials. Meanwhile, Mexico has passed a law that calls for an ambitious reform of all its state and municipal police forces. The problem: It could take 15 years or longer to complete, says Mr. Medina Mora, the attorney general.

The U.S., which is providing Mexico with some $400 million a year for equipment and training to combat drug traffickers, backs Mexico’s stand. U.S. law enforcement officials are ecstatic about Mr. Calderon’s get-tough approach. A U.S. law enforcement official says the Mexican military is trying to break down powerful drug cartels into smaller and more manageable drug gangs, like “breaking down boulders into pebbles.” He adds: “It might be bloody, it might be ugly, but it has to be done.”

Demand in the U.S., of course, is the motor for the drugs trade. Three former respected heads of state in Latin America, including Mexico’s former president Ernesto Zedillo, issued a joint report recently saying the drug war was too costly for countries like Mexico, and urged the U.S. to explore alternatives like decriminalizing marijuana.

Indeed, Mexican officials long ago gave up on thinking they might one day eliminate the drugs trade altogether. Victory now sounds a lot like what victory in Iraq might be for the U.S.: lower violence just enough so that people won’t talk about it anymore.

Jorge Tello, an adviser to President Calderon on the drugs war, defines it like this: “It’s like a rat-control problem. The rats are always down there in the sewers, you can’t really get rid of them. But what you don’t want are rats on people’s front doors.”

U.S. Secretary Of State Hillary Clinton meets Chinese Prime Minister Wen Jiabao in Beijing Saturday.

BEIJING, China (CNN) — U.S. Secretary of State Hillary Clinton met with China’s top leaders Saturday, the last and most crucial stop-over in her Asia trip, signaling the new U.S. administration’s first attempts to lay a foundation towards a China policy.

Clinton met with Chinese President Hu Jintao and discussed the framework for further high-level and mid-level discussions.

“It is essential that the United States and China have a positive, cooperative relationship,” Clinton told a group of reporters.  Earlier on Saturday, Clinton met with Chinese Premier Wen Jibao in Beijing where they discussed what they regard as the new defining Sino-US strategic goals: the world economic crisis, regional security and the environment.

The U.S. and China are the world’s largest emitters of greenhouse gases.

Human rights, a traditional topic in discussions between the two  countries, was broached during Saturday’s meeting between Clinton and Chinese Foreign Minister Yang Jiechi, who agreed to engage on a continuous discussion on the issue.

Clinton said both nations will continue to hold frank discussions on crucial human rights issues, such as Tibet and freedom of expression in China.

However, “human rights cannot interfere with the global economic crisis, the global climate change crisis and the security crises,” said Clinton.

In a welcoming response, Yang said China was willing to discuss the often contentious subject.

“Although differences exist, China is willing to conduct the dialogues with the U.S. to push forward the human rights situation on the premise of mutual respect and noninterference in each other’s internal affairs,” Yang was quoted in the Chinese Xinhua news agency.

On the economic front, both leaders emphasized the importance of working in cooperation as their economy is intertwined.

Yang said that China, the world’s top holder of U.S. debt, wants to ensure liquidity and security in its dealings with U.S. treasury bonds.

“We did use foreign exchange reserves to buy U.S. treasury bonds. Our principle of using reserves is to ensure security and liquidity,” Yang told reporters.

China-U.S. trade volume rose by 10.5 percent in 2008 to $333.7 billion, Xinhua reported.

Beijing is Clinton’s last stop in her Asia trip, her first as Secretary of State.

According to the Council on Foreign Relations, China is North Korea’s largest trade partner. It has taken a leadership position in the six-party talks, a multinational diplomatic effort to denuclearize North Korea.

In Seoul, Clinton did not refrain form harsh words, restating the U.S. position towards North Korea.

“North Korea is not going to get a different relationship with the U.S. while insulting and refusing dialogue with the republic of Korea,” she said.

Mid-level military discussions will resume this month, Clinton announced Saturday. Last October, the Bush administration notified congress of its plan to sell $6.5 billion in arms to Taiwan which caused China to suspend military talks with the US.
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Clinton told CNN’s Senior Correspondent Jill Doughtery that U.S. policy towards Taiwan will not change.