Confronted with gloomier data, economists tone down outlooks
But recovery hasn’t been derailed yet, conclude 42 experts polled for AP survey
WASHINGTON — The U.S. economic recovery will remain slow deep into next year, held back by shoppers reluctant to spend and employers hesitant to hire, according to an Associated Press survey of leading economists.
The latest quarterly AP Economy Survey shows economists have turned gloomier in the past three months. They foresee weaker growth and higher unemployment than they did before.
The Federal Reserve’s outlook has turned bleaker, too. A survey the Fed released Wednesday showed that the pace of economic activity has slowed or held steady in parts of the country.
That’s why Chairman Ben Bernanke and his colleagues are weighing new steps to invigorate the economy if the recovery shows signs of backsliding. They are also expected to hold interest rates at record lows longer than economists had expected three months ago.
Yet despite the revised expectations of slower growth, a majority of the 42 economists surveyed said they think the recovery remains on track, raising hopes that the economy can avoid falling back into a “double-dip” recession.
The AP survey compiles forecasts of leading private, corporate and academic economists on an array of indicators, including employment, consumer spending and inflation. Among their forecasts:
• Economic growth the rest of this year and early next year will weaken to less than 3 percent. From January through May, the economy grew at roughly a 3.5 percent pace.
• The unemployment rate will be no lower at the end of the year than it is now — 9.5 percent. A majority think it will be 2015 or later before the rate falls to a historically normal 5 percent.
• State budget shortfalls pose a “significant” or “severe” risk to the national economy. The loss of tax revenue has forced state and local governments to cut services and lay off workers.
The economists have turned more pessimistic since the recovery hit turbulence in May. Europe’s debt crisis sent tremors through Wall Street, causing stocks to tumble and raising doubts about the durability of the rebound.
Since then, businesses have been slow to step up hiring. Americans’ confidence in the economy has declined, leading shoppers to reduce spending. And the housing market has weakened further with the end of a homebuyer tax credit that had buoyed sales earlier this year.
Consumers aren’t leading
this rebound as they usually do, despite ultralow borrowing costs. Their spending growth will weaken in the second half of this year and strengthen only slightly next year, a majority of economists said. They think shoppers’ reluctance to spend more money poses a “significant” or “severe” risk to the recovery.
“It seems like we hit an air pocket in consumer spending,” said survey participant Richard DeKaser, president of Woodley Park Research.
The tight job market, scant pay raises and drooping home values are forcing many to spend less and save more. Americans saved 4.2 percent of their disposable income last year. That was the highest level since 1998. Economists expect about the same level of saving this year and next.
That’s why growth of less than 3 percent is forecast into 2011. And weak growth helps explain why unemployment is likely to stay high. It takes about 3 percent growth just to create enough jobs to keep pace with the population increase.
Growth would have to equal 5 percent for a full year to drive the nationwide unemployment rate down by 1 percentage point. Neither the economists in the AP survey nor the Obama administration expects that to happen.
At the same time, state budget shortfalls have emerged as a major threat in the economists’ view. When states and local governments tighten spending by trimming services and jobs, the cutbacks ripple through the broader economy, causing individuals to spend less, too.
The drop in state and local government spending during the first three months of this year shaved about half a percentage point off the U.S. gross domestic product. Nearly twothirds of the economists surveyed view the states’ budget crises as a significant or severe threat to the rebound.
Of the 12 regions tracked by the Fed’s region-by-region survey, traditionally known as the Beige Book, growth held steady in Cleveland and Kansas City but slowed in Atlanta and Chicago. Economic activity elsewhere was described as modest.
In the Fed’s Dallas region, which covers Texas and parts of New Mexico and Louisiana, the economy expanded moderately.
The Beige Book findings will figure into deliberations when the central bank’s policymakers meet next, on Aug. 10. The Fed has signaled that it will hold rates at record lows at that time and probably well into next year to help energize the recovery.
Most economists surveyed said the Fed would being raising short-term rates no sooner than next spring. In the previous survey, most had thought it could happen as soon as late this year.
Despite the risks, 55 percent of the economists described the recovery as “on track” as of the middle of the year. The rest said it was “faltering.”
“There’s a risk that the loss of momentum will snowball and feed on itself, but I think in the end the recovery will stay on track,” predicted survey participant James O’Sullivan, chief economist at MF Global.
American consumers, such as at a Target store in Boston last month, have had their confidence in the economic recovery rattled in recent months as their anxiety about their jobs has grown. For economists, consumer spending is among the most worrisome factors in the U.S. recovery.