Dec. 19 (Bloomberg) -- The U.S. economy has a 50 percent chance of falling into a depression during the next three years, said Roger Farmer, a member of the National Bureau of Economic Research’s economic fluctuations and growth program.

“There’s a significant probability things will get worse,” Farmer, 53, said during a phone interview today. “We’re certainly not at the end of the recession and things are getting worse.”

A drop in the Conference Board’s index of leading indicators, released yesterday, underscores economists’ expectations that the recession will be the longest in the postwar era as banks restrict credit, home and stock values plunge, and job losses mount. Farmer said he is predicting the U.S. recession will last at least another year.

“Everything depends on business confidence, and what I see is declining confidence,” said Farmer, who is also graduate vice-chair of the economics department of the University of California at Los Angeles.

The loss of confidence is leading households and companies to undervalue assets, which in turn is hurting consumer spending and investment, he said.

Indexed Securities

A government fiscal stimulus program will have a “questionable” immediate effect on consumption and financial markets, Farmer said. Instead, he said he supports the idea of letting the Federal Reserve or government step into the stock market by buying indexed securities such as those linked to the Standard & Poor’s 500 Index.

“I don’t think anything from historic episodes suggests that, left to itself, the economy is going to magically recover and come back to full employment,” he said. “Certainly, economies can occasionally stagnate and we should be concerned that that could potentially happen again.”

Employers cut 533,000 jobs from payrolls in November for a total loss so far this year of 1.9 million, which more than erases the 2007 gain of 1.1 million. The unemployment rate, now at 6.7 percent, may go above 10 percent and “potentially stay there for a while,” Farmer said.

Farmer’s views on the likelihood of a depression contrast with those of other economists, such as New York University professor Nouriel Roubini, who told Bloomberg Television last week that he sees a severe recession and not a depression.

The NBER’s economic fluctuations and growth program focuses on the U.S. economy. The program includes the Business Dating Committee, which officially marks the beginning and end of recessions and expansions.

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

Last Updated: December 19, 2008 20:16 EST