Economists Raise U.S. Outlook as Recession Fades
By Shobhana Chandra and Alex Tanzi
July 10 (Bloomberg) -- The U.S. economy will expand faster than previously forecast in the second half of this year and in 2010 as a revival in consumer spending signals an end to the recession, a Bloomberg News survey showed.
Growth will average 1.5 percent in the July-to-December period, compared with last month’s 1.2 percent projection, according to the median of 57 forecasts in the survey taken from July 2 to July 8. The jobless rate will exceed 10 percent early next year and average 9.8 percent for 2010.
Signs of stability in the housing market, improving consumer confidence and smaller declines in auto sales are reinforcing forecasts for gains in consumer purchases. While the recovery is likely to be tempered by job cuts and shrinking household wealth, most economists said a second stimulus package won’t be needed.
“We are on the cusp of stabilization,” said Stephen Stanley, chief economist at RBS Securities Inc. in Stamford, Connecticut. “The right things are happening. They’re not happening fast enough to make everyone comfortable just yet, but we’re certainly headed in the right direction.”
Federal Reserve officials will begin to lift the benchmark interest rate in the third quarter of next year and take it to 1 percent in the final three months, the survey showed. A month ago, economists said the Fed would hold the rate near zero until the fourth quarter of 2010.
The economy probably shrank at a 1.8 percent rate from April to June, the latest survey showed, less than economists forecast last month. The U.S. will return to growth in the current quarter and expand 2.1 percent next year.
Survey participants also raised their projections for consumer spending, which accounts for about 70 percent of the economy. Purchases will rise 1 percent this quarter after contracting in the prior three months, they said.
Growth in spending will accelerate to 1.8 percent by the first quarter of 2010.
“While the recession will be over soon, the recovery, at least in the first year, will be fairly lackluster,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. “For consumers, the biggest headwind is unemployment, and here, unfortunately, the news will get worse in the next few months.”
Confidence among U.S. consumers fell more than forecast this month as unemployment climbed, a report today showed. The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 64.6, the lowest since March, from 70.8 in June.
A separate report from the Commerce Department today showed the trade deficit unexpectedly narrowed in May as exports jumped while imports of crude oil and auto parts slid. The gap between imports and exports decreased 9.8 percent to $26 billion, the smallest since November 1999, from $28.8 billion in April.
Unemployment will rise to 10.1 percent in the first quarter of 2010 from 9.5 percent last month, already the highest since August 1983, the survey of economists showed. The U.S. has lost about 6.5 million jobs since the recession began in December 2007, the most of any downturn since World War II.
Sales reports at retailers reflect caution among consumers, who are shifting purchases to discount stores.
June sales at stores open at least a year rose at Ross Stores Inc., the Pleasanton, California-based owner of the Ross Dress for Less discount chain, and Framingham, Massachusetts- based TJX Cos., owner of T.J. Maxx stores.
Same-store sales fell more than forecast for clothing retailers Abercrombie & Fitch Co., based in New Albany, Ohio, and Gap Inc., based in San Francisco.
Output at suppliers to automakers, meanwhile, may improve in coming months as General Motors Corp., located in Detroit, and Auburn Hills, Michigan-based Chrysler Group LLC, two of the three biggest U.S. automakers, resume production at some plants. The two companies have shut down facilities as they restructure.
Klaus Kleinfeld, chief executive officer of New York-based Alcoa Inc., said he’s “very optimistic” about sales as China’s economy and the U.S. automotive industry start to recover.
“Things are bottoming out, and they are even coming back in some sectors,” Kleinfeld said in a Bloomberg Television interview on July 7. “I’d mention the automotive sector” as one area of improvement, he said.
The Standard & Poor’s 500 Stock Index has gained 30 percent since March 9, when it hit 676.53, the lowest level in more than 12 years. The index closed at 882.68 yesterday in New York. The index has dropped 6.7 percent since June 12 on concern the rebound outpaced prospects for a recovery in the economy.
‘Right on Track’
“I think the market got a little bit ahead of the economy,” Fed Bank of St. Louis President James Bullard said yesterday in a Bloomberg Television interview. “I do not think the recovery is faltering. If you look at the projections that were made in December of last year, we’re right on track.”
The Fed last month said it will let one of its emergency programs expire and trim two others, a sign that improving financial markets allow a first step toward ending its unprecedented interventions.
President Barack Obama’s $787 billion stimulus package, which includes tax cuts and infrastructure spending, will push the federal budget deficit to 12.1 percent of gross domestic product this fiscal year, according to the survey, up from 12 percent in the June poll and the highest since monthly records began in 1968.
Cash for Cars
A program starting later this month to give American consumers cash to purchase new vehicles while trading in less- fuel-efficient older ones also may spur production and support growth, economists predict.
Of the 40 survey participants who answered a special question on the stimulus spending, 33 ruled out the need for a second package. Democrats who control Congress are divided over whether to push for more deficit spending, complicating the possibility of a second stimulus bill.
“The biggest impact of the stimulus is still to come in the second half of this year, so it’s a bit premature to talk of a second round,” IHS Global’s Behravesh said. Another dose would be “overdoing it” he said, adding, “where will the money come from?”
Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania, said while “all the big negatives for the economy are becoming much less negative,” further stimulus spending may be required.
“I wouldn’t rule out the possibility that the economy may need more help next year,” he said.