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Anxiety Mounts as U.S. Economy Limps into 2nd Half

Thursday, 05 Jul 2012 05:13 PM

 

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A slew of weak U.S. economic data is casting doubts over expectations of a pick-up in growth in the second half of the year.

From manufacturing to job growth to consumer spending, the numbers have been grim, and economists are wondering whether they need to dial down forecasts for the remainder of the year.

"Our sense was that of a gradual improvement. Now the sense is of muddling along at a low level of activity," said Adolfo Laurenti, deputy chief economist at Mesirow Financial in Chicago. "We went from seeing progress, though gradual and very uneven, to not seeing progress at all."

The economy grew at a 1.9 percent annual pace in the first quarter and estimates for the April-June period are increasingly coming in around 1.5 percent.

A high level of uncertainty as Europe struggles with a debt crisis and as the United States stares at the prospect of a sharp budgetary tightening at the start of next year seem to have led businesses and ordinary Americans to watch their dollars carefully.

While the so-called U.S. fiscal cliff - a combination of expiring tax cuts and automatic government spending cuts - will be hit only in early 2013, if Congress does not act, an increasing economic toll could be exacted in the second half of this year.

"I don't think we are going to get a resolution before the fourth quarter," said Julia Coronado, chief North America economist at BNP Paribas in New York.

"Companies and households won't know what their tax liabilities are going to look like in 2013, what the regulatory or spending backdrop is. It's going to be an uncertainty which weighs on people's ability to make plans."

The latest Reuters survey estimates third-quarter growth at around a 2.3 percent pace, with fourth-quarter GDP at about 2.4 percent. But some economists say these forecasts already appear a bit optimistic.

"Right now we have a forecast that is around 2 percent in the second half ... (and) while I expect growth to stay on track, it's hard to point to a factor that's going to lead to an acceleration," said Coronado. "The risk is that the second half of the year will also lead to growth that is below 2 percent."

 

FADING AUTO STIMULUS

Growth in the first half of the year was largely driven by automobile production and sales, which accounted for about 61 percent of the period's 1.9 percent increase in GDP.

Sales were boosted by pent-up demand after last year's earthquake and tsunami in Japan left U.S. showrooms bereft of popular models.

But economists say that demand now seems largely exhausted. They also point out that most of the purchases were by companies replacing their fleets. That suggests less support for the economy from autos in the future, particularly since much of the spending was funded from savings.

"Given the weak labor market, we are going to see consumers become a little cautious on vehicle purchases," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester Pennsylvania.

"With gasoline prices coming off the boil, there is less of an urgency to go out and trade in gas-guzzlers for more efficient cars. Consumers are not going to shoulder the recovery, spending is not going lead overall growth."

It's unclear what will take up the slack.

The housing market, where home sales and prices have trended higher in recent months, should offer some support as demand for furniture and other household items picks up. Construction activity is also strengthening, but homebuilding accounts for only about 2.3 percent of GDP.

Even more worrying for economists is the persistent service sector sluggishness. Services account for about 65 percent of consumer spending and around 45 percent of GDP.

The sector grew at a rate of just 0.8 percent in the first quarter after a 0.4 percent gain in the prior three months.

"This is the issue here. When services are growing at less than 1 percent, you have a tough road ahead. It's not going to be easy (to have higher growth rate), that's where it's all at," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. (Editing by Dan Grebler)

© 2014 Thomson/Reuters. All rights reserved.

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