Optimists Cut U.S. Forecasts as Jobs, Spending Outlook Dims
Federal Reserve Chairman Ben S. Bernanke prepared to deliver a speech on the outlook for the U.S. economy as some of the most optimistic forecasters scaled back their projections for growth in the second half.
Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, now estimates a 2.3 percent rate of expansion this quarter, down from a June forecast of 4.1 percent. Joseph LaVorgna at Deutsche Bank Securities Inc. slashed his estimate to a 2 percent annual pace. As recently as two weeks ago, he projected 4.6 percent.
“We have to be realistic and acknowledge that the economic data have been weaker than we thought,” said New York-based LaVorgna, his firm’s chief U.S. economist. “We’re more concerned about the near-term risk to growth than the longer- term.”
After cutting the benchmark interest rate to near zero and buying more than $1.7 trillion in housing debt and Treasury securities, there may be little more policy makers can do to spur growth other than bolster sentiment, Stanley and LaVorgna said. Bernanke is set to address central bankers from around the world at 10 a.m. Eastern time at a symposium in Jackson Hole, Wyoming.
The Fed should “spur confidence and emphasize that the medium-term outlook at this point is still good,” said Stanley, a former economist at the Fed Bank of Richmond. By now, “I thought we would’ve for sure turned the corner and there would be no fears of a double dip,” he said. Stanley now puts the odds of relapsing into a second recession at about 20 percent, up from 10 percent in April.
Bernanke will spell out options for restarting large-scale purchases of securities, a strategy known as quantitative easing, said Paul McCulley, a managing director at Pacific Investment Management Co.
“What we’re looking at first and foremost is the clarification on the forecast and two, some degree of clarity on how they would put together contingency plans for actually pulling the QE2 trigger,” McCulley said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene. “We have more confusion right now in the marketplace about the Fed’s true intentions than we’ve had for quite some time.”
The Federal Open Market Committee on Aug. 10 decided to maintain the central bank’s holdings of securities at $2.05 trillion to keep money from being drained out of the financial system. The FOMC bank said it will reinvest principal payments on its mortgage holdings into long-term Treasury securities.
The panel also said that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”
Alan Blinder, a former Fed vice chairman, said in a telephone interview that it’s “relatively likely” that the central bank will ease policy further.
“Things seem to be losing momentum,” said Blinder, a Princeton University economist who put the odds of a relapse into a recession at 25 percent to 30 percent. “The lending part of the financial system doesn’t seem to be curing itself.”
Companies created 51,000 jobs on average from May through July, down from 200,000 in the prior two months, according to Labor Department data. Investment in capital equipment, one of the few remaining bright spots, dropped last month and businesses also reined in equipment and machinery orders, indicating the slowdown in spending will persist.
“The labor market has definitely downshifted from where it was earlier this year,” said Stanley, who previously forecast monthly gains of 250,000 in company payrolls before the end of the year. He said he foresees a gain of 60,000 in private payrolls for August.
The housing market, which helped trigger the worst recession since the 1930s, is showing signs of slumping again after a government tax credit expired in April. Sales of new homes dropped to a record low last month and purchases of existing houses plunged 27 percent, the most in records going back four decades, according to reports from the Commerce Department and the National Association of Realtors.
Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania, said he expects the Fed to take steps over the next few months to shore up growth.
“The economy will, at best, be very weak, so weak that unemployment will begin to rise again,” Zandi said in a Bloomberg Television interview yesterday with Margaret Brennan. “That’ll be the signal for the Fed to resume quantitative easing.”
Economists at Goldman Sachs Group Inc. in New York also say the Fed needs to do more. Treasury-security purchases “will be forthcoming later this year or early next year, as slow growth and rising unemployment raise concerns about a potential double dip,” the economists led by Jan Hatzius wrote in a note to clients this week.
LaVorgna isn’t convinced policy makers can do more.
“The Fed should make themselves irrelevant by not doing much,” he said. “This is largely a confidence game.”