August 4, 2011 in Business

Economy stalled; confidence falls

Growth forecasts revised downward
Paul Wiseman Associated Press
 
Waiting for a sign

At the heart of the economy’s problems are the debts that consumers built up during the early and mid-2000s. Many borrowed against the equity in their homes.

When housing prices collapsed, people were left owing more than their homes were worth. Others charged up their credit cards. Now it’s payback time, and Americans are spending less or spending cautiously as they slash their debts.

Companies are reluctant to hire until they’re convinced enough customers are ready to buy their products or services. Corporate profits are booming, though, because companies laid off millions of workers, learned to operate more efficiently with smaller staffs and expanded in growing markets overseas.

“If companies were inclined to hire, they could,” said Leo Abruzzese, global forecasting director for the Economist Intelligence Unit.

So companies are waiting for consumers to spend, and consumers are waiting for companies to hire them or offer generous pay raises and job security. It’s a tough cycle to break.

WASHINGTON – Shoppers won’t shop. Companies won’t hire. The government won’t spend on economic stimulus – it’s cutting instead. And the Federal Reserve is reluctant to do anything more.

Without much to invigorate growth, the economy may be in danger of slipping into a stupor like the one Japan has failed to shake off for more than a decade. And Wall Street is spooked.

The Dow Jones industrial average Wednesday barely broke an eight-day losing streak, finishing up about 30 points. A nine-day losing streak would have been the Dow’s first since February 1978.

Even with the gain, the Dow has fallen 828 points, or 6.5 percent, over the past nine trading days.

Kurt Karl, chief U.S. economist at Swiss Re, has cut his 2011 forecast for growth this year to 1.8 percent from 2.6 percent. And he has bumped up the likelihood of another recession to 20 percent from 15 percent.

“The last week has made it much more likely that corporate profit estimates will be revised lower,” said Nick Kalivas, a vice president of financial research at MF Global.

Investors have pushed government bond yields to their lowest level of the year. The 10-year Treasury note now yields 2.6 percent. Bond yields typically fall when the economy is weak because investors view bonds as a safe place to park their money, and there’s less chance that inflation will erode their value.

The economy started sputtering early in the year. Economists at first thought the slowdown would be temporary, the result of a short-term rise in gasoline prices and an earthquake in Japan that disrupted shipments of auto parts and electronics.

But the weakness persisted. And it worsened as a political fight over debt and deficits raised the risk that the U.S. government would not be able to pay its bills.

“It now seems fairly clear that those shocks have done a lot more damage than we expected,” says Leo Abruzzese, global forecasting director for the Economist Intelligence Unit. “They seem to have had a devastating effect on confidence.”

After the government reported that the economy grew at an annual pace of 0.4 percent in the first quarter and 1.3 percent in the second, Abruzzese is cutting his estimate for 2011 growth from 2.4 percent to less than 2 percent.

“Sales are what keeps the market moving higher, and there’s not much demand when there’s only 0.4 percent growth,” said Andrew Goldberg, U.S. market strategist at JP Morgan Funds.

When the economy grows less than 2 percent over a 12-month period, it risks slipping into recession, says Mark Vitner, senior economist at Wells Fargo Securities. Over the most recent such period, the economy grew just 1.6 percent.

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