The two-year-old U.S. recovery’s staying power may be diminishing as consumers and the government pare spending, say five of the nine economists on the academic panel that dates recessions.
“This economy is really balanced on the edge,” Harvard University economics professor Martin Feldstein, a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, said yesterday in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “There’s now a 50 percent chance that we could slide into a new recession. Nothing has given us much growth.”
A greater-than-expected slowdown in the first half of 2011 poses risks for the world’s largest economy, said economist Robert Hall of Stanford University, the panel’s chairman. Gross domestic product climbed at a 1.3 percent annual rate from April through June after a 0.4 percent gain in the prior quarter that was less than earlier estimated, Commerce Department figures showed July 29.
“The slower the growth rate, the more likely it is that an adverse shock would cause a recession,” Hall said in an interview.
While the committee doesn’t forecast the odds of a recession, individual members can make their own predictions, Hall said. The panel took more than a year to determine that the deepest contraction since the 1930s ended in June 2009, a finding made in September 2010.
Depth of Recession
Gross domestic product shrank 5.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the previously reported 4.1 percent drop, the Commerce Department said last week. The second-worst contraction in the post-World War II era was a 3.7 percent decline in 1957-58.
“The risks have gone up for another recession compared to where we were six months ago,” Christina Romer, a former chairman of the White House Council of Economic Advisers and a professor at the University of California, Berkeley, said in a Bloomberg Television interview Aug. 1 on “Street Smart” with Carol Massar and Matt Miller. She predicted “anemic, but positive, growth.”
Committee members cited weakness in housing, employment, and business confidence and efforts to reduce debt by consumers and government as hurdles to growth. Four academics on the panel either declined give odds of a recession or didn’t respond to requests for comment.
Consumer spending unexpectedly dropped in June for the first time in almost two years, while the savings rate rose, Commerce Department figures showed yesterday in Washington.
“Consumption is down because debt repayments are squeezing spending even this long after the crisis,” Hall said. “It will be a painful process until debt-dependent consumers are back on their feet.”
Manufacturers are restraining production in response to weak consumer demand. Manufacturing in the U.S. almost stalled in July, a report from the Institute for Supply Management showed Aug. 1.
The unemployment rate probably stayed at 9.2 percent in July as payrolls climbed by 85,000 workers, according to a Bloomberg News survey ahead of the Labor Department’s Aug. 5 report. Through June, the economy recovered about 1.77 million of the 8.75 million jobs lost as a result of the 18-month recession that began in December 2007.
“We certainly are in a more vulnerable situation now,” and a new shock could spark a downturn, similar to the contraction after oil prices jumped with Iraq’s invasion of Kuwait in 1990, said James Stock, a Harvard economist on the NBER panel. “Looking around the world, it is sure possible to think of shocks of the Kuwait magnitude that could tip us over the edge.”
Business confidence has been shaken by the months-long debate over raising the debt ceiling, Stock said.
President Barack Obama yesterday signed a debt-limit compromise that prevents a U.S. default on the day the Treasury Department had warned the nation’s borrowing authority would expire. The measure raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years.
“The U.S. debt ceiling debate has, I think, really eroded confidence among consumers and businesses in addition to creating uncertainty,” Stock said in an interview. “The resolution of uncertainty with the compromise doesn’t restore with it the view of legislative competence in economic management.”
Cutbacks in government spending will be a drag on growth next year, said Jeffrey Frankel, another Harvard professor on the NBER committee. While recession risks have risen, they are “not necessarily enough to push the probability over one half.”
“The government is a source of contraction this year,” Frankel said. “Fiscal stimulus is being withdrawn at the federal, state, and local levels.”
Committee member Robert Gordon of Northwestern University, who didn’t estimate odds on a recession, and Feldstein agreed that the “hangover” from the housing bubble continues to plague the economy.
“There is a vast oversupply of housing that has crushed any chance of recovery of residential construction, which for the last three years has been operating at about 25 percent of the housing starts registered in 2005-06,” Gordon said.