U.S. economy faces likely slowdown, big year-end decisions

McClatchy NewspapersApril 23, 2012 

— Between now and the November elections, President Barack Obama and Mitt Romney will heartily promise that under their stewardship, the economy will get much better.

Don’t bet on it, economists warn.

Rather than a breakout surge in economic growth, mainstream forecasters say, Americans should expect the U.S. economy to slog forward for another couple of years.

The economy grew at a subpar annual rate of 1.7 percent last year, down from 3 percent the year before. The consensus forecast for this year now is for growth of 2 to 2.5 percent.

The U.S. economy is expected to slow later this year, dragged down by slowing global growth, rising anxiety about the elections and the specter of gridlock in Washington over urgent tax, spending and debt deadlines. The Bush-era tax cuts of 2001 and 2003 and the payroll tax cut of the past two years expire at year’s end, when last year’s debt deal also will force across-the-board cuts in federal spending unless Congress and the president strike new deals, but there’s no consensus on that.

A spate of recent indicators punctuated fears that the economy is stalling. March delivered only 120,000 new jobs, and the latest manufacturing and real estate data softened. Some economists say the economy’s strong six-month run through March might not be sustainable.

“If we’re right and growth was overstated in the first quarter and we see payback in the second and third quarters of this year, then it’s going to raise a lot of questions of just how much progress we’ve made over the past few years,” said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, N.C.

Vitner projects an annual growth rate of 3.1 percent for the first three months of this years; the Bureau of Economic Analysis will release its official data Friday. Then Vitner expects a slowdown; he projects that growth for the whole year will average only 2.3 percent. That’s better than last year, but it’s below historical standards and certainly weak for an economy that officially exited recession in June 2009.

The expected two-year slog ahead rises from several roots. Chief among them is that growth is slowing in much of the world. China’s long-torrid pace is decelerating to single digits. South American giant Brazil is struggling to spark new growth. And parts of Europe are already in recession as the region’s debt crisis lumbers along.

Recent U.S. data have been discouraging for what remains the world’s largest economy.

In the two weeks after the April 6 release of the weak March employment numbers, first-time jobless claims rose. The Labor Department said last Thursday that the four-week average for unemployment claims stood at 374,750 _ the highest since January.

Additionally, the job placement firm Challenger, Gray & Christmas reported earlier this month that employers announced 9.4 percent more layoffs in the first three months of this year than the same period last year. Last year’s numbers, however, were the smallest number of layoffs since 1995.

It all points to slower hiring.

“Were we on the verge of a breakout? I think the answer is no,” said Kevin Logan, the chief U.S. economist for the global bank HSBC.

Noting that the economy is adding jobs in a monthly range of 100,000 to 200,000, Logan expects hiring to bump along the bottom. “The next few months, we’ll fall back into this slower pattern,” he said, adding that several drivers of the U.S. economy remain impaired.

Chief among them is the moribund housing market, which remains mired in a foreclosure crisis. What little housing is moving in many major U.S. cities is foreclosure sales and short-sales, dragging down home prices and erasing the potential wealth of neighbors.

Sales of existing homes in March slumped 2.6 percent from the previous month, the National Association of Realtors reported last Thursday. Even so, the number represented improvement over March 2011.

“The recovery is happening, though not at a breakout pace, but we have seen nine consecutive months of year-over-year sales increases,” Lawrence Yun, the association’s chief economist, said in a statement.

The sluggish housing sector affects construction and manufacturing, industries that feed into home sales through everything from bathroom remodeling to lawn mowers and wood for decks.

Not all economists are glum, however.

Mark Zandi, the chief economist for forecaster Moody’s Analytics, thinks the U.S. economy is poised for a breakout performance _ IF political hurdles in Washington are cleared by next spring.

Those hurdles include what to do about the expiring tax cuts of 2001 and 2003. They’re slated to revert to 1990s tax rates at year’s end. The payroll tax cut of the past two years, which has helped American family finances, also expires then.

And, on Dec. 31, absent some compromise, the federal debt limit will be breached, triggering broad across-the-board cuts to federal spending.

If Washington fails to dispel those year-end clouds, the lack of resolution could shave U.S. growth next year by 3 percentage points, enough to push us back into recession, as the economy is expected to be growing more slowly than that.

“That’s going to be pretty hard for the economy to digest early next year,” Zandi said. “I think the next president has to make some pretty big decisions and come to terms with the next Congress pretty fast.”

It’ll get done, Zandi suggested, because the consequences of failure are too great.

“I think if the next president can nail those two things down, the prospects (for the economy) are quite good,” he said.

Until then, however, the specter of unresolved politics will weigh heavily on the economy.

“As we move closer to the election, a lot of decisions are going to be put on hold. Hiring is going to slow; business spending is going to slow,” Vitner said. “It’s not just the election. As we get closer to what happens with taxes, the temporary Social Security tax cut, does it get extended? What happens … with health care? There is a lot of uncertainty.”

email: khall(at)mcclatchydc.com

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