Growth Forecasts for U.S. Reduced Through 2013 on Limited Employment Gains

Global financial strains, government fiscal austerity and a lack of jobs will hurt U.S. growth over the next couple of years, according to economists surveyed this month by Bloomberg News.

The world’s largest economy will expand at an average 2.3 percent annual rate in the second half of the year, about a percentage point less than projected last month, according to the median forecast of 53 economists polled from Aug. 2 to Aug. 10. Gross domestic product will grow 2.4 percent next year and 2.8 percent in 2013, also less than previously estimated.

Companies like General Motors Co. (GM) are concerned consumers will limit spending as economists foresee the jobless rate averaging at least 8 percent through 2013. Mounting pessimism is one reason Federal Reserve policy makers said this week they are prepared to take additional action to spur the economy.

“We’re on a path that looks like persistent growth, but growth that is inadequate to solving our short-run problems,” said Neal Soss, chief economist at Credit Suisse in New York. “Markets are signaling to businesses and households the future is less certain. When your future appears to be out of control, it’s easier to pull back than it is to get aggressive.”

Soss cut his 2012 GDP forecast to 2.1 percent from 3.1 percent last month. The survey median for growth next year was marked down from a July estimate of 3 percent. It fell from 3.2 percent for 2013.

The risk of a recession has risen to 30 percent from 14 percent in July, according to the median of the 39 economists who responded.

Rating Downgrade

Standard & Poor’s downgraded the U.S.’s credit rating last week for the first time, while the European debt crisis spread to Italy and Spain, triggering emergency purchases of those countries’ bonds by the region’s central bank. Almost $3 trillion was erased from U.S. stock values in the past three weeks. The S&P 500 Index has lost almost 13 percent since July 22, while the yield on the benchmark 10-year Treasury note has declined to 2.34 percent from 2.96 percent.

“There’s a lot of turmoil in the business, and turmoil means uncertainty,” General Motors Chief Executive Officer Dan Akerson said Aug. 9. Stock market swings may discourage consumers from buying new vehicles, preventing the Detroit-based automaker from reaching its forecast for at least 13 million sales this year, Akerson said. GM shares have lost 16 percent in the past month.

‘A Real Drag’

“We have this financial stress that we didn’t build into the picture which can potentially be a real drag” on the economy, said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. The uncertainty caused by the volatility is a “big part of the recession risk.” Kasman, who said there is a one in three risk of recession, cut his 2012 GDP forecast to 2.2 percent from 2.8 percent in the July survey.

S&P’s credit downgrade came after lawmakers agreed on Aug. 2 to raise the nation’s debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said it preferred. Moody’s Investors Service and Fitch Ratings kept their top rankings on U.S. debt.

A report today from Thomson Reuters/University of Michigan showed the downgrade and plunging share prices so far in August depressed confidence. The group’s gauge of sentiment plunged to a three-decade low of 54.9 this month from 63.7 in July.

Threat to Sales

The decrease poses a threat to retail sales, which climbed in the July by the most in four months. Purchases rose 0.5 percent after a June increase of 0.3 percent, the Commerce Department said today.

It’s unclear whether payroll tax cuts and other short-term stimulus measures will be extended following additional negotiations, said Goldman Sachs Group Inc. economist Andrew Tilton.

“Right now they’re not scheduled to be extended, so that would mean a significant fiscal tightening at the beginning of 2012,” said Tilton. Goldman forecasts government spending cuts will shave 0.75 percentage point off GDP in 2011 and 1 point in 2012. The reduction would climb to 1.5 percentage points next year should the payroll tax break expire.

Concern among economists also grew after government revisions last month showed the economy almost stalled in the first half of the year, meaning any additional shocks could potentially halt the recovery.

Not a Lot Left

“Everyone keeps asking what’s going to boost growth, what’s going to get us out of this, and, frankly, I’m not sure there’s a lot left out there,” said Omair Sharif, an economist at RBS Securities LLC in Stamford, Connecticut.

The Fed’s outlook has dimmed as well. The Federal Open Market Committee said in an Aug. 9 statement that it expects a “somewhat slower pace of recovery over coming quarters,” and that the “downside risks to the economic outlook have increased.”

Policy makers pledged to keep the benchmark interest rate at a record low at least through mid-2013 and said they are “prepared to employ” additional tools to boost growth.

Central bankers “may need to go further,” said Kurt Karl, chief U.S. economist at Swiss RE in New York. “Unfortunately, I don’t think it makes sense to look for change from Congress or the administration.” Karl was among the 29 economists who posted a 2013 forecast, lowering it to 3 percent from 3.3 percent in July.

One constant this month was economists’ inflation forecasts. The Fed’s preferred price gauge, which excludes food and energy costs, will rise 1.7 percent this year and 1.8 percent in 2012, the same as last month and within central bank’s informal target range of 1.7 percent to 2 percent.

Unemployment will average 9 percent in 2011, up from the 8.9 percent initially forecast. The projections put President Barack Obama running for re-election with unemployment near 8.5 percent at the end of 2012.

To contact the reporters on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net; Kristy Scheuble in Washington at kmckeaney@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz cwellisz@bloomberg.net

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