Reports confirm decelerating economy
By Neil Irwin,
The latest evidence on the economy suggests that the tense standoff between Congress and the Obama administration over raising the debt ceiling is coming at a terrible time — not in a period of robust or even passable growth, but at a time the U.S. economy is barely eking out any expansion at all.
“We had lost momentum even before the debt limit really became a big issue,” said James F. O’Sullivan, chief economist at MF Global. “It’s never a good time for something like this, but if we were coming off of six months of 250,000 job growth [per month] we would be much more able to withstand this. The economy does look vulnerable now.”
On Friday, the government will release its broadest measure of economic activity for the spring, and forecasters are expecting it to show a painfully weak recovery. Gross domestic product is forecast to have risen 1.8 percent in the three months ended June 30, almost identical to the 1.9 percent rise in the first quarter.
Two reports Wednesday confirmed that the economy was decelerating even before the standoff over the federal debt ceiling came to a head in July. The Commerce Department said that orders for durable goods fell a surprising 2.1 percent in June; analysts had forecast a 0.3 percent gain.
A measure that captures business investment outside of the volatile defense and aircraft sectors fell 0.4 percent, while analysts had expected a 1 percent increase. The report prompted one leading firm, Macroeconomic Advisers, to lower its estimate for growth in the April through June quarter a tenth of a percentage point, to a 1.3 percent annual rate.
And the new installment of the Federal Reserve’s “beige book,” its regular compilation of anecdotal reports from businesses around the country, found that the pace of growth has “moderated” in most places, particularly in the eastern United States. The six Fed districts closest to the Atlantic “reported a slowdown in activity,” the document said.
The beige book, which is prepared in advance of each Fed policy meeting to help officials at the central bank make their decisions on monetary policy, does have some bright spots. Consumer spending increased in most of the country, perhaps helped by lower gasoline prices. Service-oriented industries also grew. The summer tourism season has started out stronger than last year in most areas — or at least in areas unaffected by severe weather.
At the same time, demand for loans was more mixed than earlier in the year, and the labor market “remained soft” in most of the Fed’s 12 districts.
All that points to a U.S. economy that was hardly on solid footing as the summer began. Job growth was exceptionally weak in both May and June, for example. The second quarter GDP report due out Friday morning is likely to offer further evidence.
“The U.S. economic picture for the first half of 2011 will not be a pretty one,” Gregory Daco, principal U.S. economist for IHS Global Insight, said in a report. “One will remember the slowdown in the manufacturing sector, a bounce back in the unemployment rate, weak housing, poor confidence, and the debt-ceiling debacle.”
It is hard to know with certainty how the debt standoff and the risk of a U.S. debt downgrade or default will affect the overall economy. It is possible that the standoff will exact little toll, though anecdotal information shows that businesspeople are antsy about the situation in ways that could constrain their hiring and investment.
In the New England states served by the Federal Reserve Bank of Boston, for example, the beige book reported that “most contacts express concern about current and future negative effects of increased uncertainty attributable in part to failure to resolve the U.S. debt-ceiling dispute promptly and the associated unclear future course of federal expenditures and taxes.”
And the angst over the budget has clearly spooked the stock market, which frequently coincides with business confidence more generally. Wednesday, as the brinksmanship over the debt ceiling continued unresolved, the Standard & Poor’s 500 Index fell 2 percent. In general, the stock market has moved up and down in the last two weeks in line with the tenor of the debt negotiations.
“It’s going to be hard to prove exactly how much the debt-ceiling debate is going to hurt the overall economy, but the bottom line is it’s certainly a negative,” O’Sullivan of MF Global said.