Con­fronted with gloomier data, econ­o­mists tone down out­looks

But re­cov­ery hasn’t been de­railed yet, con­clude 42 ex­perts polled for AP sur­vey

Austin American-Statesman - - BUSINESS - By Jeannine Aversa

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.

Con­sumer spend­ing

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.

State short­falls

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.

Steven Senne

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.

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