Hiring picked up much faster in July than expected. Car sales remain solid. Home prices are climbing again in parts of the country. It all points to a strong second half of 2012, right? Not necessarily.
Weighing against growth are the ongoing debt crisis in Europe, a clear slowdown in China and uncertainty over a bitter presidential election, expiring Bush-era tax cuts and the possibility of steep, across-the-board cuts in government spending.
That’s led most economists to predict sluggish growth at best for the latter half of the year, and some even whisper that recession is possible next year.
“It’s kind of what I call a very uncomfortable economy,” said Mark Zandi, the chief economist for forecaster Moody’s Analytics and a frequent witness before Congress.
Even Zandi’s silver lining – that construction will add growth in the second half of the year, pulling the annualized growth for the year to 2 percent or better, up from the second quarter’s 1.5 percent – “means we make no progress on unemployment.”
With the jobless rate at 8.3 percent, “it means the economy is very vulnerable to what could go wrong,” he said.
Kate Warne, an economist and market strategist for the investment firm Edward Jones, told a recent economic roundtable at the U.S. Chamber of Commerce that there are reasons for optimism, one of them being improvement in the housing sector. After several years of dragging against economic growth, it’s now contributing to it.
“I think we’re finally seeing housing stabilize,” she said.
The National Association of Realtors reported Thursday that the median sales price for existing single-family homes rose in the second quarter in 110 out of the 147 metropolitan areas it tracks, compared with the same three months last year.
But even that sign of improvement isn’t likely to lead to a return of good times in the latter half of the year. “We think we’re going to see more of the same,” Warne said.
Mark Vitner, a senior economist at Wells Fargo Securities, agrees that the “housing market has been a notable exception to the recent run of disappointing news.” The company’s National Association of Home Builders/Wells Fargo Housing Market Index, which gauges builders’ perceptions of the real estate market, rose by 6 points in July, with builders pointing to rising sales and more buyer traffic.
However, economic readings on income, consumer spending and manufacturing activity all point to more sluggishness ahead, he said.
Even the housing market improvement is tentative. In his Housing Chartbook research note for July, Vitner wrote that while “improvement was evident in every region” and “was particularly pronounced in the West,” the supply of foreclosed homes remains daunting.
More than 2 million homes are in what’s called a foreclosure pre-sale inventory, he said, and another 1.6 million are more than 90 days late on payments. There also are at least 11.4 million homes that are thought to be worth less than the mortgages they carry.
It all tempers how much positive news can be squeezed from an improvement in the housing sector.
How growth plays out also may depend in large measure on how close to the edge of the so-called fiscal cliff lawmakers and the president will take the nation. This cliff includes expiring Bush-era tax cuts and scheduled deep across-the-board reductions in government spending that if left to their own could cost the nation 3 percentage points or more of economic growth.
Given that the economy has grown at a rate of 2.2 percent over the past 12 months, that would mean instant recession.
President Barack Obama and Republicans in Congress are deeply divided on the tax cuts, which expire at the end of the year, and resolving that issue is crucial to finding a way to atop the automatic spending reductions, which Congress imposed on itself last year as a “poison pill” that, in theory, would force a compromise on spending.
Obama would like Congress to extend the tax cuts for families with adjusted gross incomes of less than $250,000 annually while raising taxes on those who make more, while Republicans want the tax reductions extended for all income groups.
Few expect a compromise before the November elections, but financial markets anticipate a resolution before the year ends. Douglas Holtz-Eakin, a former director of the Congressional Budget Office, isn’t so sure there will be a compromise at all, however: If the two sides can’t agree before the election, why would they agree afterward, he reasons.
The question then is whether global investors, fearing the lack of compromise, will shed stocks and bonds and create the kind of market turmoil that forces lawmakers to act. Given debt problems abroad, U.S. financial markets have been the prettiest horse at the glue factory.
“If you start to lose the beauty contest, you are still in the glue factory,” Holtz-Eakin said, adding that investor sentiment can turn negative quickly. “You don’t have to be an economist to figure out what happens: You go south and the only question is for how long.”
A former top adviser to the presidential campaign of Sen. John McCain, R-Ariz., Holtz-Eakin thinks a recession is a real possibility next year.
Gross federal debt, everything the government owes, now exceeds 100 percent of the U.S. economy, he said during the chamber event. History suggests that countries with that debt level grow at least a percentage point more slowly than they would have otherwise. That means there’d be about 1 million fewer jobs than there would have been otherwise, too.
Another risk factor for the U.S. economy is how big the economic slowdown in China will be, with economists fearing that it will turn out to be more pronounced than is currently projected. The Chinese government has struggled to spark growth and contain inflation at the same time, a delicate balancing act. China’s slowdown hits U.S. exports, and at some point it may lead China to focus its foreign earnings inward, shunning U.S. government bonds. China is the top buyer of U.S. debt.
“I think it’s critical to focus on that,” said Martin Regalia, the chief economist for the U.S. Chamber of Commerce.
The Federal Reserve, charged with promoting full employment and creating stable prices, has pronounced itself ready to act if the U.S. economy is in need of a further spark. In recent years, it’s purchased large quantities of government bonds in an effort to drive down long-term lending rates and thus force investors searching for higher returns to make investments that stimulate economic activity.
That process is called quantitative easing, and there’s great debate about whether another go of it would yield much bang for the buck. The Fed has yet to take the step, despite the economy’s doldrums, leading many to question whether it’s trying to feed perceptions while not actually undertaking new initiatives.
“I think the Fed is trying to appear active while not doing anything,” said Warne, the Edward Jones strategist.