Saturday, July 30, 2011

US Growth Falling Short in 2011

U.S. growth falling short

Catherine Rampell, New York Times
Friday, July 29, 2011

Washington --The economy slowed to a snail's pace in the first half of 2011, underscoring a growing risk that the recovery itself may hang in the balance with budget and debt decisions in Washington.

The broadest measure of the economy, the gross domestic product, grew at an annual rate of less than 1 percent in the first half of the year, the Commerce Department reported Friday. The figures for the first quarter and the second quarter, 0.4 percent and 1.3 percent respectively, were well below what economists were expecting and signified a sharp slowdown from the early months of the recovery. The government also revised data going back to 2003 that showed the recession was deeper, and the recovery weaker, than initially believed.

"There's nothing that you can look at here that is signaling some revival in growth in the second half of the year, and, in fact, we may see another catastrophically weak quarter next quarter if things go wrong next week," said Nigel Gault, chief U.S. economist at IHS Global Insight, referring to the debt-ceiling negotiations.

With so little growth, the economy can hardly withstand further shocks from home or abroad, and worrisome signals continue to emanate from heavily indebted European countries. If the domestic economy were to contract, any new recession would originate on President Obama's watch - unlike the last one, which began a year before he was elected.

Drags on growth

If Congress leaves existing budget plans intact, some of the government's economic assistance, like the payroll tax cut, will phase out and thereby act as a drag on growth.

And by many economists' thinking, whatever additional budget cuts Congress eventually agrees to (or does not) will weaken the economy even further.

On the one hand, if legislators cannot come to an agreement to raise the debt ceiling by Tuesday, the United States may be unable to pay all its bills. Borrowing costs across the economy could then surge because so many interest rates are pegged to how much it costs the federal government to borrow. The forecasting firm Macroeconomic Advisers has predicted that the resulting financial mayhem would most likely plunge the economy back into recession.

On the other hand, if legislators do reach an agreement, it will probably include austerity measures that could chip away at the already fragile recovery. Spending cuts - particularly if they take effect sooner rather than later, as some of the House's more conservative members want - will weaken the economy, since so many industries and workers are directly or indirectly dependent on government activity.

Macroeconomic Advisers has estimated that the plan of Sen. Harry Reid, the Nevada Democrat who serves as majority leader, for example, could shave a half a percentage point off growth as its spending cuts peak.

Citing the debt reductions that Congress undertook in 1937 that ushered in the most severe phase of the Great Depression, some economists fear that imposing austerity measures too soon could likewise result in a recessionary relapse.

Simply prolonging the debt negotiations could also damage prospects for growth in the third quarter, as businesses and families wait to make big purchases until the threat of a federal default subsides.

"The business and consumer uncertainty over whether the government will be able to pay its bills is the biggest thing weighing around our neck right now," said Austan Goolsbee, departing chairman of the president's Council of Economic Advisers.

Smaller economy

The economy is smaller today than it was before the Great Recession began in 2007, though the country's labor force and production capacity have grown. The outlook for digging out of that hole is getting weaker by the day, and analysts across Wall Street have begun slashing their forecasts for output and job growth for the rest of this year.

Usually, a sharp recession is followed by a sharp recovery, meaning the recovery growth rate is far faster than the long-term average growth rate; last quarter, though, output grew at less than half of the average rate seen in the 60 years preceding the Great Recession.

Particularly distressing to economists is that consumer spending - which, alongside housing, usually leads the way in a recovery - has been extraordinarily weak in recent quarters. Inflation-adjusted consumer spending in the second quarter barely budged, increasing just 0.1 percent at an annual rate, the Commerce Department report showed.

"People are spending more, but that spending is being absorbed in higher prices, not in buying more stuff," said John Ryding, chief economist at RDQ Economics.

"Sometimes it feels like I'm a physicist who's been flipped into a different universe trying to explain these revisions, rather than an economist tracking output growth," Ryding said. "The economy is clearly performing poorly, though we don't know quite how poorly because these individual quarterly revisions can sometimes be something of a joke."

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