Economists Are Increasingly Bearish on U.S. Recovery

Aug. 16, 2011
'The near-term economic outlook is significantly weaker than it was just a month ago.'

The threat of a new recession is rising in the United States, economists say, as they slash their growth forecasts for the second half of the year.

Slowing global expansion, the plunge in U.S. stock markets after Standard & Poor's cut the country's credit rating, and political pressure on the government to cut spending rather than stimulate growth are all putting the brakes on the world's largest economy, economists say.

Mostly negative data -- though with a few bright spots -- has reinforced feelings that the recovery from the 2008-2009 recession is in trouble.

And the Federal Reserve's own warning last week of increased "downside risks" to growth in the second half has added to the gloomy picture.

Mark Zandi, the top economist for Moody's Analytics, said Monday that the firm cut its growth outlook for the second half to 2%, from a 3.5% forecast just last month.

"The near-term economic outlook is significantly weaker than it was just a month ago," he said in a new report.

"The odds of a renewed recession over the next 12 months are one in three, and rising with each 100-point drop in the Dow."

Goldman Sachs said the economy appeared to be moving at less than "stall speed" after, at best, a mere 0.8% growth in the first half.

"With growth clearly below trend, the unemployment rate has crept up slightly, suggesting the possibility of a self-reinforcing deterioration in the economy," Goldman said -- also predicting a 33% chance for a recession.

Grim Data

A raft of poor economics statistics -- on second-quarter growth, layoffs and job creation, industrial production, consumer spending, and consumer and business sentiment -- underpin the lower projections.

On Friday, a University of Michigan survey showed consumer sentiment at its lowest level since May 1980.

And on Monday, the Fed's New York manufacturing survey for August also took a sharp downward turn.

The Fed gave no sense of optimism last week when it announced it would keep interest rates at ultralow levels for two more years because of the weak economy.

After a one-day meeting, the U.S. central bank's policy board forecast growth at a "somewhat slower pace" over the coming quarters than it had estimated in June.

"Downside risks to the economic outlook have increased," it added.

Also darkening the picture is the context, points out Goldman: the ongoing debt troubles in Europe, that are beginning to affect US financial institutions, and the expectation that Republicans will force more fiscal tightening domestically in the wake of the Aug. 2 debt-ceiling deal.

One key will be whether the government can push through any short-term stimulus measures, such as extending unemployment benefits or the payroll tax cut about to expire at year-end.

But S&P's downgrade "has if anything increased the likelihood of fiscal restraint," Goldman said.

The Fed hinted it is reviewing its tools to support growth, but nothing concrete has emerged, and economists are skeptical it could add much of a short-term charge.

Unemployment, Stock Markets Are Key Variables

Aside from Europe, two other variables are important -- first, the direction of unemployment, which if it worsens will slow consumer spending; and secondly, the markets.

Zandi says that if stock markets continue to fall, it will drag down wealth, confidence and spending.

"Since equity prices peaked in late April, well over $3 trillion in wealth has evaporated. Since every $1 decline in stock wealth is estimated to reduce consumer spending by three cents, the loss to date means spending will take a $100 billion hit over the coming year," he said.

Not all are as pessimistic. Jeffrey Rosen at has grabbed onto positive retail sales data for July released last week as a rosier sign for the rest of the year.

With falling prices for fuel and food commodities, he said, inflation will ease and consumer spending will get a boost in coming months, Rosen predicted.

Briefing, an economics consultancy, boosted its forecast for the third quarter to 2.2% from 2%.

But Rosen warned that the United States will find it hard to get growth back to more than 2.4% until consumers cut more of their debt -- a process that he said could take another decade or more.

Copyright Agence France-Presse, 2011

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