A soft patch or something worse?

WASHINGTON Sun Apr 17, 2011 3:03pm EDT

A man walks past the Youngstown Business Incubator in Youngstown, Ohio April 9, 2011. REUTERS/Eric Thayer

A man walks past the Youngstown Business Incubator in Youngstown, Ohio April 9, 2011.

Credit: Reuters/Eric Thayer

WASHINGTON (Reuters) - The U.S. economy appears to be running dangerously close to stall speed, and the rest of the world may not have enough oomph to compensate.

At the start of 2011, growth looked solid. The U.S. unemployment rate was finally dropping, consumers were in a spending mood, and economists were busily upgrading first-quarter growth projections to the range of 4 percent.

Those forecasts are falling fast. Many economists now think the U.S. economy grew at a sluggish 1.5 percent to 2 percent pace over the first three months of the year, and one forecaster even raised the possibility of a negative reading.

Whether this is a short-lived blip or a more worrisome dip depends largely on which way oil prices move, and how consumers and businesses around the world respond.

Goldman Sachs economist Andrew Tilton said downside risk was "unfortunately a phrase we have been using a lot lately."

A quiet week for economic data probably won't bring much, if any, good news. The highlights include a clutch of U.S. housing reports, which will serve as yet another reminder that the real estate slump persists.

Emerging markets have been the strongest global growth engine, giving advanced economies an export boost. But rising inflation pressures mean many countries will be clamping down on credit conditions, which would curb growth. Barclays Capital called inflation the "predominant risk" facing China.

GLASS HALF FULL

As for the United States, Barclays cut its first-quarter growth forecast to a rate of 2 percent from 3.5 percent, not quite as gloomy a forecast as some other Wall Street banks have published.

But Barclays economist Michael Gapen said the forces holding back first-quarter growth would likely prove "temporary" and the firm raised its second-quarter growth forecast -- a rarity these days.

Gapen said economic measures such as industrial production and employment "have all been moving in a way that is consistent with strong, not weak, economic growth."

American consumers have kept up spending on durable goods, including buying autos which should be sensitive to rising oil prices, and that bodes well for growth, Gapen said.

The flip side of that argument is that consumer confidence faded as oil and gasoline prices spiked, and if that translates into slower consumption the economy will suffer. Consumer spending accounts for some 70 percent of the U.S. economy.

"The extra cost of about 70 cents per gallon, relative to prices at the end of 2010, is siphoning off household income at a run rate equivalent to $100 billion per year -- income that otherwise could have been spent on other goods and services," Goldman's Tilton said.

His firm is still forecasting that consumer spending will pick up in the second quarter, but he said that "will require a fortuitous combination of circumstances."

Those circumstances include further labor market improvement, lower gasoline prices, and strong financial markets that encourage households to pare savings.

GLASS HALF EMPTY

If oil prices don't cooperate, all bets are off.

Not only would expensive oil exacerbate inflation pressures in emerging markets, pushing them to tighten credit conditions even further, it would also sap U.S. discretionary spending.

Capital Economics holds one of the most bearish views on the U.S. economy, predicting first-quarter growth at just a 1 percent annual rate.

"There is now even a decent outside chance that the economy contracted outright," economist Paul Ashworth said, adding that the surge in energy and food prices "changed everything."

If first-quarter growth was indeed as weak as Ashworth predicts, that would mean employment growth outpaced economic growth, leading to weaker productivity and weaker corporate profits. That in turn would cause slower business spending and hiring -- and an even weaker growth trajectory.

(Editing by Andrea Ricci)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (6)
jasdilg wrote:
Why should we care what anyone at Goldman says about the economy? Is there a reason they have any credibility worthy of being quoted in a reputable media outlet?

Apr 17, 2011 3:26pm EDT  --  Report as abuse
Julianalien wrote:
Don’t blame me,I voted for Ron Paul.But go ahead and keep printing valueless money and sending our industry overseas with no tariffs to back up the ones who try to stay…see what happens.

Apr 17, 2011 4:50pm EDT  --  Report as abuse
Alfred.Brock wrote:
Hold purchases. Watch and wait. The present activities of the Federal Government by meddling in bond, stock and monetary markets domestically and abroad cannot be maintained and will fail. They can’t even balance their own measly budget

Apr 17, 2011 5:42pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.