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WSJ’s Wessel: US Economic Storm Clouds Have Few Silver Linings

By Barton Webster   |   Thursday, 26 Jul 2012 08:16 AM

Recent data suggest the U.S. economy may be headed towards another recession, and surveys of upcoming data are not comforting, columnist David Wessel writes in the Wall Street Journal. Political and exogenous risks loom.

Economic growth is slow, and slowing. The economy expanded at a 1.9 percent annual pace in the first quarter, and analysts estimate the government will report Friday that GDP slowed to between 1 percent and 1.5 percent in the second quarter.

Federal Reserve Chairman Ben Bernanke last week said the U.S. job market is "stuck in the mud."

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

Most forecaster agree, Wessel writes. Retail sales have declined for three months in a row and consumer confidence is falling. Manufacturing, a pillar of the recovery so far, is showing signs of weakening. Government spending cuts are slowing the economy. Europe, which buys about 20 percent of U.S. exports, is in a recession and the rest of the world is slowing. Drought will likely push up food prices, hurting consumers.

Most forecasters conclude it all adds up to "sluggish growth, but no recession,’’ Wessel writes. Bernanke concurs. Last week, he also forecast "continued moderate growth,’’ adding, "We don’t see a double-dip recession.’’

But the Fed, and most forecasters, have been overly optimistic. In June 2011, Fed officials estimated the U.S. would grow between 3.3 percent and 3.7 percent this year. Last month, they forecast between 1.9 percent and 2.4 percent. Some have since turned gloomier.

Some CEOs are sounding worried. "A lot of weak numbers over the past two months caused us concern for the next six months," Scott Davis of United Parcel Service Inc. told analysts Tuesday. He predicted the U.S. will grow at close to 1 percent through the rest of the year, but he doesn’t see a recession.

In a recent Wall Street Journal survey, analysts put the odds of a recession in the next 12 months at only 21 percent. Economists rarely call recessions correctly. In August 2007, they put the risks at 28 percent. By December, the economy was in the worst downturn since the Great Depression.

Storm clouds are on the horizon.

Markets are watching to see if Europe’s politicians can do more than apply short-term remedies to Europe’s banking and sovereign-debt woes. Any blowup in Europe would hurt U.S. exports, disrupt global financial markets and deepen the anxiety felt by U.S. households and companies.

As Europe crumbles, so does the euro. And that means a stronger dollar, which weakens U.S. exports to the rest of the world.

While oil prices are down, an Iran that feels besieged by the West may be tempted to tighten the oil spigot.

Government in the U.S. isn’t helping, he writes. State and local governments are slowing spending and raising taxes. The federal government may do the same, if Congress fails to head off the fiscal cliff of planned spending cuts and higher taxes beginning in 2013.

While most analysts don’t see us jumping off that cliff, anxiety is deepening as it gets closer, making it likelier that consumers, investors and businesses will start pulling back.

If foreign demand and government spending weaken, economic growth in the U.S. will depend on homebuilders, automakers, consumers and executives to boost spending and investment.

With all the risks looming on the horizon, they just may not feel like it.

Meanwhile, European stocks rose today after European Central Bank President Mario Draghi said policymakers had enough ammunition to save the euro, Bloomberg News reported.

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said in a speech in London. “And believe me, it will be enough.”

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

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