August 11, 2010 / 7:00 PM / 7 years ago

Analysis: Fast-fading recovery now looks even weaker

WASHINGTON (Reuters) - U.S. consumers will set the course for a gasping economic recovery that is starting to lose two of its strongest sources of support.

Economists have long expected that growth would slow in the second half of this year as government stimulus spending dries up, state and local governments slash outlays, and companies finish restocking lean inventories.

What they did not anticipate was that the economy would lose most of its momentum before the year was half over, a surprisingly swift slowdown that prompted the Federal Reserve to rethink its economic outlook and announce more steps to prop up the recovery.

“The anemic recovery just got even slower,” said Jay Bryson, global economist with Wells Fargo in Charlotte, North Carolina.

Stock investors, reconsidering growth prospects, dumped shares on Wednesday, with the Dow Jones industrial average down 250 points by mid-afternoon.

Recent data suggests the second-quarter growth rate was far weaker than initially reported -- so weak that it might even have slipped back into negative territory were it not for federal government spending and inventory building.

In response to recent weak readings, the Fed announced on Tuesday it would reinvest proceeds from its mortgage-related assets to buy more U.S. government bonds, a move aimed at shoring up the recovery.

The latest cause for concern came from trade figures which showed imports surged in June, pushing the trade gap to its widest level since October 2008, the height of the financial crisis.

Because gross domestic product measures output within the United States, imports are subtracted from growth figures. Between that and other disappointing economic reports, many economists now think second-quarter GDP grew at perhaps a 1.2 percent pace, half the rate that the Commerce Department reported little more than a week ago.

Some say the second quarter may look even worse. Barclays Capital economist Peter Newland said his second-quarter GDP figure was now tracking at just a 0.3 percent annualized rate, down from his previous estimate of 1.6 percent.

Consumers will determine what happens next.

If they step up the pace of spending, the growth rate in the second half of the year may turn out to be stronger than in the latest quarter.

If they do not, that surge in imports could lead to overstocked shelves, forcing companies to cut back even more and raising the specter of a fresh recession.

With unemployment at an abnormally high 9.5 percent and unlikely to come down much before next year, consumers are not likely to return to their pre-crisis free-spending ways.

The lofty jobless rate and the downward pressure on wages it produces is one reason some investors worry the risk of potentially crippling deflation is on the rise.

However, economists do expect personal consumption to accelerate from the second-quarter’s lackluster 1.6 percent annual growth rate.

Consumer spending accounts for about 70 percent of GDP, so even a modest pickup in demand would go a long way toward assuring the United States avoids another recession.

Government spending and inventory rebuilding have done the heavy lifting during the year-long recovery. In the latest quarter, those two factors accounted for 80 percent of GDP growth, and that percentage could turn out to be even larger if GDP is revised down as far as some economists now expect.

They won’t add nearly as much to growth going forward.

The $862 billion stimulus package that President Barack Obama signed in February 2009 was designed to be a two-year program and most of the money has already been allocated.

State and local governments are cutting spending to close a combined budget gap that could be as large as $127 billion.

And companies appear to be through the bulk of their inventory rebuilding binge.


There are some reasons to suspect the import bonanza that triggered the latest bout of second-quarter growth markdowns will be short-lived. J.P. Morgan economist Michael Feroli said Chinese exporters may have rushed goods onto ships in order to beat a July 15 expiration there of a value added tax rebate.

If that is the case, China’s exports to the United States may slow in the coming months, which could add to U.S. GDP.

There was also a perplexing element to the trade data which will need to be clarified.

A report released on Tuesday showed wholesale inventories were not as swollen as expected, so if imports jumped but inventories didn‘t, where did all that stuff end up?

“It’s not obvious where all these goods are going,” J.P. Morgan’s Feroli said.

That puzzle focuses even more attention than usual on Friday’s retail sales report. Not only will that provide some insight into the strength of consumer spending, but it will also include retail inventory figures for June.

If the data shows consumption picking up and inventories staying stable, it may ease some of the double-dip concerns. If the numbers move the opposite way, it could reinforce fears that the worst is yet to come.

Editing by Philip Barbara

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