A lack of jobs will shackle consumer spending and restrain the U.S. recovery more than previously estimated, according to economists polled by Bloomberg News.
Gross domestic product will expand at an average 2.55 percent annual rate in the last six months of 2010, according to the median of 67 estimates in a survey taken July 31 to Aug. 9, down from the 2.8 percent pace projected last month. Household purchases will climb at a 2.25 percent rate, compared with a 2.6 percent gain previously forecast.
“Simply put, job growth in the private sector hasn’t improved as we would’ve expected,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “The consumer continues to contribute to growth but at a subpar pace.”
Federal Reserve policy makers yesterday also lowered their sights on the projected speed of the economic rebound, prompting officials to take additional steps to bolster the economy for the first time in a year. Slack growth will push back the first increase in the central bank’s target interest rate until the second half of 2011, according to the Bloomberg survey.
U.S. stocks dropped the most in three weeks as equities retreated from Tokyo to Moscow to London amid speculation the Fed’s stimulus plan indicates the economic recovery is in jeopardy. The Standard & Poor’s 500 Index fell 2.8 percent to 1,089.47 at the 4 p.m. close in New York. The yield on the two- year Treasury note declined to a record low.
Consumer spending, which accounts for about 70 percent of the economy will grow 1.5 percent this year, down from a 2.4 percent gain forecast a month ago, according to the survey median estimate. In addition to the lowered expectations for the second half of 2010, the downgrade also reflects the annual GDP revisions issued by the Commerce Department last month.
Purchases, which rose 3 percent on average over the past three decades, dropped 1.2 percent last year, the biggest decrease since 1942.
After boosting payrolls by 200,000 workers on average in March and April, companies scaled back the pace of hiring to an average 51,000 over the past three months. The jobless rate held at 9.5 percent in July and reached a 26-year high of 10.1 percent in October.
Joblessness will be slow to fall, signaling it will take years for the economy to recover the more than 8 million jobs lost during the recession that began in December 2007. Unemployment will average 9.6 percent in 2010 and 9.1 percent next year, according to the survey.
“Unemployment is high, income growth has been pretty slow,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, who lowered estimates for growth and spending. “Household wealth is a lot lower than it was three years ago.”
Job creation, the sluggish recovery and the growing budget deficit are likely to be top issues in November elections that will decide control of Congress.
Support for President Barack Obama has fallen as the unemployment rate has been slow to retreat. His job approval over a three-day period ending Aug. 9 was 46 percent, compared with 55 percent at the same time last year, according to a Gallup poll.
Economists marked down this year’s growth pace by 0.1 percentage point to 3 percent, with the expansion cooling to 2.8 percent in 2011.
“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement after meeting yesterday. The central bank said it will reinvest principal payments on its mortgage holdings in long-term Treasury securities.
The Fed’s benchmark interest rate on overnight loans between banks will rise to 0.5 percent in the third quarter of 2011, according to this month’s survey median. Last month, economists projected the first increase would occur in the April-to-June period. The rate has been in a range of zero to 0.25 percent since December 2008.
All of this month’s forecasts were received prior to yesterday’s Fed announcement.
The central bank’s decision will not influence his growth forecasts, Bill Cheney, chief economist at John Hancock Financial Services in Boston, said in an interview yesterday after the central bank’s announcement.
“This amount of bond purchases doesn’t seem likely to make much of an impact,” Cheney said. “The level of long-term rates and mortgage rates is really not the binding constraint on the economy. The problem is not interest rates, it’s spending.”
The average rate on a 30-year fixed mortgage fell to 4.49 percent in the first week of August, the lowest level since Freddie Mac started keeping weekly data in 1972.
“We need a stronger economy, job creation and better consumer confidence,” Richard Dugas, chief executive officer of PulteGroup Inc., said in an Aug. 4 conference call. “Our industry continues to face incredibly low demand.”
The largest U.S. homebuilder by revenue unexpectedly reported its first quarterly profit since 2006 after a tax benefit and sales boost from its purchase of Centex Corp.