A string of disappointing economic data capped by last week’s jobs report is prompting even some of the more optimistic economists to question the durability of the U.S. recovery.
While analysts such as Stephen Stanley of Pierpoint Securities LLC and Michael Feroli of JPMorgan Chase & Co. still see growth strengthening in the months ahead, they voiced concern that the lull in the economy may prove prolonged, leaving it more vulnerable to external shocks or policy missteps.
“We’ll do better in the second half,” said Feroli, chief U.S. economist for JPMorgan in New York and a former member of the Federal Reserve’s forecasting team. “That said, the concern is that there’s enough weakness that could feed on itself.”
Policy makers have limited leeway to respond to the accumulating signs of slowdown. The Fed is completing its purchase of $600 billion of Treasury securities this month, leaving it with a $2.77 trillion balance sheet that some central bankers fret is already too big.
The record $1.6 trillion federal budget deficit that the White House projects this year has left President Barack Obama with little room to use fiscal policy to spur the economy, especially with Republican lawmakers calling for cuts in spending, rather than more investment.
“Our economy is not creating enough jobs, and Democrats’ binge of taxing, spending, borrowing and over-regulating is a big part of the reason why,” John Boehner, speaker of the House of Representatives and a Republican from Ohio, said in a statement on June 3.
Jobless Rate Climbs
Payrolls grew at the slowest pace in eight months in May and the unemployment rate unexpectedly climbed to 9.1 percent from 9 percent in April, Labor Department figures released on June 3 showed. The 54,000 rise in jobs followed a 232,000 gain in April and was below the 165,000 median increase forecast by economists in a Bloomberg News survey.
The jobs numbers followed a series of economic statistics suggesting that the economy is decelerating. Manufacturing grew at its slowest pace in more than in year in May, according to Institute for Supply Management data released last week. Consumer spending, which accounts for 70 percent of the economy, rose less than forecast in April as households felt the pinch of grocery and energy costs, a Commerce Department report showed.
Stanley, who is chief economist at Pierpoint in Stamford, Connecticut, said he is betting that the softness in the economy will prove to be temporary, the result of a surge in gasoline prices that has since subsided and supply disruptions from the March earthquake and tsunami in Japan. Like Feroli, though, he is becoming more concerned.
“I’m starting to get worried,” Stanley said. The economy’s “animal spirits are fragile.”
Investor concern over the economy sent stocks down. The Dow Jones Industrial Average lost 97.29 points, or 0.8 percent, to 12,151.26 in New York on June 3, extending a fifth straight weekly loss, its longest slump since 2004. The Standard & Poor’s 500 Index dropped 1 percent to 1,300.16. Treasuries rose, pushing yields on two-year notes down three basis points to 0.43 percent, the lowest this year.
Feroli and Stanley started the year more optimistic than many of their peers. The economy was forecast to expand 3.1 percent in 2011, according to the median estimate of economists in a Bloomberg News survey published Jan. 13. At the time, Stanley’s projection was 3.8 percent, while Feroli predicted 3.3 percent growth. Stanley has since cut his forecast to 2.9 percent while Feroli has lowered his to 2.4 percent.
The two are not alone in shaving their forecasts. Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, projected growth of 3.3 percent for 2011 at the start of the year, on a fourth-quarter over fourth-quarter basis, and has reduced that to 3.1 percent.
Dean Maki, chief U.S. economist at Barclays Capital Inc., has trimmed his 2011 forecast to 2.5 percent, down from a 3.1 percent estimate at the beginning of the year.
Economists aren’t the only ones with reason to worry: the latest jobs numbers pose a challenge to President Obama, whose re-election prospects hinge on pushing the jobless rate lower.
“The danger is that if we continue to take two steps forward, two steps back, people are going to continue to suffer a high level of economic anxiety,” said Bill Carrick, a Democratic strategist. “There’s no way that can be good politically for the president.”
Austan Goolsbee, Obama’s chief economist, said the jobs report represents a “little bump” in the road to recovery and that the broader trends are “substantially more positive” than when Obama took office in January 2009.
“We should never read too much into any one month’s report,” Goolsbee, chairman of the Council of Economic Advisers, said in a June 3 interview on Bloomberg Television. “No doubt we face some headwinds.”
The slow pace of the recovery doesn’t come as surprise to Kenneth Rogoff, a former International Monetary Fund chief economist who is now a professor at Harvard University in Cambridge, Massachusetts. History shows that it takes time for economies to recover from financial crises like the one that hit the U.S.