Growth Slowdown Seen in U.S. as Recession Dodged

The U.S. economy looks set to deliver a repeat performance in 2012: for the third straight year, it may suffer a swoon yet not slip into a recession.

“I don’t think the slowdown will be any more consequential than the past two years,” said John Ryding, a former Federal Reserve researcher who is chief economist at RDQ Economics LLC in New York. “There are positives out there in the economy. We’ll avoid a recession.”

Household balance sheets are in better shape, with indebtedness down about $100 billion in the first quarter, according to the New York Fed. Banks are more profitable: Earnings have risen for 11 straight quarters, based on data compiled by the Federal Deposit Insurance Corp. Even the housing market is reviving, with starts through the first four months of this year 24 percent higher than the comparable 2011 period.

Stocks plunged on Friday on news that American employers last month added the fewest workers to their payrolls in a year while the jobless rate rose. Treasuries gained, sending yields to record lows, as investors sought refuge from rising financial strains in Europe and slowing growth in the U.S. and China. German and U.K. yields fell to all-time lows after Spanish Economy Minister Luis de Guindos said the future of the euro is at stake.

Orders to U.S. factories unexpectedly declined for a second month in April, pointing to a deceleration in manufacturing as the global economy cools, a Commerce Department report showed today. Bookings dropped 0.6 percent after a revised 2.1 percent slump in March, the first back-to-back decreases in more than three years.

Stocks Fall

Stocks reversed losses late today as the cheapest price-to- earnings valuation for the Standard & Poor’s 500 Index in sixth months overshadowed the drop in factory orders. The S&P 500 rose less than 0.1 percent to 1,278.18 at the 4 p.m. close in New York.

Following the jobs report, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, lowered his forecast for third-quarter economic growth to 2 percent from 3 percent. He sees the economy expanding 2.5 percent this quarter.

Allen Sinai, chief executive officer of Decision Economics in New York, bumped up his odds of a recession next year to 15 percent from 10 percent.

Mitt Romney, the presumptive Republican nominee in November’s presidential election, seized on the jobs figures to attack Barack Obama. “It is now clear to everyone that President Obama’s policies have failed to achieve their goals,” he said in a statement.

Obama Administration

The administration, seeking to blunt the political impact, highlighted private payroll gains over the past 27 months while promoting measures Obama has proposed to boost hiring.

The decline in jobs growth to 69,000 last month from a high this year of 275,000 in January was reminiscent of the labor- market cooling that occurred in both 2010 and 2011. Then as now, employers turned skittish as Europe’s sovereign-debt woes worsened.

Repeating the pattern of the last two years, Fed Chairman Ben S. Bernanke and his fellow central bankers are likely to respond to the job-market weakness by announcing further steps to stimulate growth. The moves could come when the Fed meets on June 19-20 to decide monetary strategy, Feroli said in a note to clients. Bernanke may give a hint of the Fed’s plans when he testifies to Congress on June 7.

Central Banks

Policy makers elsewhere face even more pressure to come up with ways to boost their economies. The European Central Bank may cut its benchmark interest rate from 1 percent as soon as this week, Holger Schmieding, chief economist at Berenberg Bank in London, said in a June 1 report. China will respond with a 2 trillion yuan ($314 billion) fiscal stimulus this year and next, according to Donald Straszheim, senior managing director of New York-based ISI Group.

Sinai said the U.S. is in “better shape” to weather the global economic tremors than it was in the past, and in comparison with other countries today, provided the euro region’s currency compact doesn’t collapse completely. He sees U.S. growth picking up to 2.5 to 3 percent in the second half of this year as consumer spending expands, encouraging employers to take on more workers.

Household purchases rose 0.3 percent in April, the Commerce Department reported on June 1. That followed a 2.7 percent annualized increase in the first quarter, the most since the final three months of 2010.

Chain-Store Sales

Demand is holding up at store chains. Retailers’ same-store sales topped analysts’ estimates in May. Sales at Minneapolis- based Target Corp. (TGT), the second-largest U.S. discount retailer, climbed 4.4 percent. Framingham, Massachusetts-based TJX Cos., the owner of T.J. Maxx and Marshalls, posted an 8 percent increase, reports showed last week.

While automobile sales slipped in May from April, they were still up 17 percent from a year earlier, according to Ward’s Automotive Group.

Consumers are benefitting from easier credit terms as financial institutions seek to put the money they’ve earned to work. U.S. banks “eased standards on credit card, auto and other consumer loans,” according to the Fed’s quarterly survey of senior loan officers, released on April 30.

Investor nervousness over the world economy has pluses and minuses for U.S. households. On the negative side, it has pushed down stock prices, reducing household net worth. On the positive side, it has helped bring down gasoline prices and mortgage rates.

The average price of regular unleaded gasoline fell to $3.61 a gallon on May 31 from a 2012 high of $3.94 on April 5, according to AAA, the nation’s largest motoring group, as oil demand ebbed with the slowing world economy.

Commodity Prices

“We’re benefitting from a global drop-off in commodity prices,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

Rates for 30-year U.S. mortgages fell to a record as concern about Europe’s financial crisis drove investors to the safety of the government bonds that guide borrowing costs. The average rate for a 30-year mortgage dropped to 3.75 percent in the week ended May 31 from 3.78 percent, according to Freddie Mac, the McLean, Virginia-based mortgage financier.

The drop in loan rates is aiding housing, the trigger for the worst recession since the Great Depression. Confidence among U.S. homebuilders jumped to a five-year high in May, the National Association of Home Builders/Wells Fargo index showed.

Toll Brothers Inc. (TOL) is among builders benefiting from the revival in demand. Second-quarter profit at the Horsham, Pennsylvania-based company exceeded analysts’ estimates as orders surged 47 percent from a year earlier.

“While domestic and global headline risk remains a concern,” Chairman Robert Toll said on a May 23 earnings call, “we are feeling better than we have at any time in the past five years.”

To contact the reporters on this story: Rich Miller in Washington at rmiller28@bloomberg.net; Shobhana Chandra in Washington at schandra1@bloomberg.net

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

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