Economists Downgrade U.S. Recovery Outlook in Survey (Update1)
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By Shobhana Chandra and Alex Tanzi
http://www.bloomberg.com/apps/news?pid=20601103&sid=a_sshBl4b2ok&refer=us
May 12 (Bloomberg) -- Economists downgraded their projections for a recovery from the deepest U.S. recession in half a century, now seeing the jobless rate exceeding 8 percent through 2011, a Bloomberg News survey showed.
Unemployment will average 8.5 percent in 2011 after a 9.6 percent rate next year, higher than previously expected, according to the median forecast in the survey taken from May 4 to May 11. The economy may expand 2.8 percent in 2011, less than estimated last month, after a 1.9 percent rise in 2010.
“The worse the labor market is and the longer that lasts, the more difficult it’ll be for consumers to recover,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. “The economy isn’t going to come roaring out of the box here.”
A weaker recovery will keep pressure on the Obama administration, lawmakers and Federal Reserve officials to maintain the emergency lending and stimulus programs implemented in the past year. Shapiro said the danger is that policy makers may “pull out too soon.”
The economy will contract at a 1.9 percent pace this quarter, returning to a growth rate of 0.5 percent in the July to September period and 1.8 percent in the final three months, according to the median forecast of 61 economists surveyed.
Spending Outlook
Consumer spending, after stagnating this quarter, will not exceed the first three months’ 2.2 percent gain in the second half of the year, the survey showed. Such spending accounts for 70 percent of the economy.
The unemployment rate jumped to 8.9 percent in April, the highest level in 25 years, and the economy has lost 5.7 million jobs since the recession began in December 2007, the most of any economic slump since the Great Depression, according to Labor Department figures.
Stock-index futures advanced today and equities have climbed globally in the past two months, on optimism that the worst of the recession has passed. Contracts on the Standard & Poor’s 500 Stock Index were up 0.3 percent at 912.00 at 7:54 a.m. in New York. Benchmark 10-year Treasury yields rose 3 basis points from late yesterday, to 3.20 percent.
Krugman’s Caution
Still, Paul Krugman, Princeton University’s Nobel Prize- winning economist, said global economic prospects don’t justify the two-month rally that has restored $8.9 trillion to stock markets around the world.
“It looks to me now as if the markets are now pricing in a rapid recovery, that they’re pricing in a V-shaped recession, which I consider extremely unlikely,” Krugman said at a forum in Shanghai today. “The market seems to be looking as if this is going to be an average recession, but it’s not.”
Some companies have yet to see any signs of recovery. Airgas Inc., the biggest U.S. distributor of industrial gases, last week forecast per-share earnings may fall this year and said April sales failed to pick up as expected.
“We are expecting no improvement in the economy during the calendar year,” Chief Executive Officer Peter McCausland said on a May 6 conference call with analysts. “We’ve never seen a downturn like this. When we see a tick up, then we’ll say things have stabilized.”
Capital Needs
The credit crunch, while easing, is clouding prospects for a recovery. Ten of the 19 largest U.S. banks will need another $75 billion in capital to withstand deterioration in the economy almost as dire as economists now anticipate, according to results of government tests issued last week. Examiners used an “adverse scenario” of a 3.3 percent decline in gross domestic product this year, and an average unemployment rate of 10.3 percent in 2010.
“The financial crisis is still making people wonder how far and how fast this economy can come back,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Credit is the life blood of the economy and bank balance sheets are still very constrained. That will put a damper on the strength of this recovery.”
A benchmark interest rate that’s already near zero and a yawning government budget gap make it unlikely the government will step in with additional spending, Rupkey said. “We may need more stimulus, but we can’t afford more at this stage,” he said.
Budget Gap
President Barack Obama’s $787 billion stimulus plan, which includes tax cuts, infrastructure spending and a goal to create or save 3.5 million jobs, will drain the budget, the survey showed. The federal deficit may jump to 12.2 percent of GDP this year, more than prior estimates. Forecasts for 2010 and 2011 also exceeded last year’s 5.8 percent share.
“The credit market would not take kindly to a further expansion of the budget deficit and it could run the risk of backfiring,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York. Foreign investors don’t like large deficits and an additional increase would shut off the flow of funds into the U.S., he said, pushing up bond yields “and sending the dollar into a tailspin.”
Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York, is more sanguine about the outlook. “Economic performance in the next few quarters will surprise a lot of people,” he said.
“It’ll start slow and gather steam,” Kasman said, still “it’ll not be sufficient to return the economy to health.” There’s a “risk that we’re not through the adjustment of businesses cutting labor costs.”
