The stock market reacted quickly to the bad news. Stocks were sluggish on Thursday’s opening after tumbling hard Wednesday, with the Dow Jones industrial average dropping at its sharpest pace since June and the Standard & Poor’s 500 index showing its steepest decline since August.
Just a few months ago, the economy seemed poised to finally strengthen. Business confidence was rising, and extensive government efforts to foster growth were underway. But those hopes are being dashed. Forecasters who once projected economic growth of 3.5 to 4 percent for the year have slashed their estimates with each round of disappointing numbers.
Instead of accelerating, the U.S. economy is puttering along at a growth rate of 2 to 3 percent — barely enough to bring down joblessness, if at all.
“The recovery continues, but at a disturbingly slow pace,” said Diane Swonk, chief economist for Mesirow Financial.
The weak expansion comes despite government efforts to boost it: a payroll tax cut that took effect in January and an initiative by the Federal Reserve to pump $600 billion into the ailing economy by buying Treasury bonds. But the Fed is unlikely to take further action, and Congress is focused on reducing the budget deficit instead of tax cuts or new spending that might spur economic activity.
The worsening economic prospects reflect, in part, the effects of the Japanese earthquake and tsunami in March, which caused disruptions for some U.S. manufacturers, and a spike in oil prices this year. On Thursday retailers reported only a slight uptick in sales for May as consumers cope with higher gas and food prices.
But it is the underlying weakness of the U.S. economy that may have allowed these developments to knock the recovery off course.
“We’re structurally in a place where we’re going to be more vulnerable to downside risks than if the economy was growing strongly, and that’s what we’re seeing right now,” said Robert A. Dye, senior economist at PNC Financial Services Group. “We’re not far above stall speed.”
The signs are not all bad. Prices for oil and other globally traded commodities have gone down substantially since the end of April, and will eventually lower the costs of gasoline and other goods, and the impact of the earthquake will subside as factories in Japan reopen. Moreover, U.S. businesses this year have been cutting inventories that they will eventually need to rebuild, spurring economic activity.
But the outlook, as projected by economic forecasters and implied in government data, is clearly dimming. Economists at J.P. Morgan Chase on Wednesday lowered their projection for 2011 growth in gross domestic product to 2 percent. A week ago, those same economists had reduced the figure to 2.5 percent.