Global recovery hopes scaled down

Two months ago, Goldman Sachs projected that the economy would grow at a 4 per cent annual rate in the quarter ending in June. The firm now expects the government to report no more than 2 per cent growth when data for the second quarter is released in a few weeks. Macroeconomic Advisers, a research firm, had projected 3.5 per cent growth back in April and is now down to just 2.1 per cent for this quarter.

Both these firms, well respected in their analyses, have cut their forecasts for the second half of the year as well. Then this week, the Federal Reserve downgraded its projections for the full year, to less than 3 per cent growth. It started the year with guidance as high as 3.9 per cent. Two years into the official recovery, the economy is still behaving like a plane taxiing indefinitely on the runway. Few economists are predicting an out-and-out return to recession, but the risk has increased, with the health of the US economy depending in part on what is really “transitory.”

During the first news conference in the central bank’s history two months ago, Federal Reserve Chairman Ben S Bernanke used the word to describe factors – including supply chain disruptions after the earthquake and tsunami in Japan and rising oil prices – that were restraining economic growth in the first half of the year. Bernanke this week confessed that “some of these headwinds may be stronger and more persistent than we thought,” adding, “we don’t have a precise read on why this slower pace of growth is persisting.”

Economists say the unexpected shocks from Japan and the Middle East in the first half of the year only go partway toward explaining the deceleration. Many worries remain: Housing prices have continued to fall, hiring is weak, wages are flat, growth in emerging economies like China and India are slowing and the debt crisis in Europe could have ripple effects. What’s more, government stimulants like the payroll tax cut and the extension of unemployment benefits are scheduled to expire at the end of this year. With the underlying economy undeniably tepid, economists are concerned that further shocks to the system could knock the country off its slow upward trajectory.

There was a glimmer of hope recently when the government reported that orders for appliances and other equipment from manufacturers were higher than expected in May. And the Commerce Department edged up its estimate of growth in the first three months of the year to 1.9 per cent from 1.8 per cent. The slowly expanding economy is not entirely surprising, though it is clearly painful for those who are out of work and whose homes are worth far less than a few years ago. Many economists, most prominently Kenneth S Rogoff and Carmen M Reinhart, have emphasised that recovering from a financial crisis takes much longer than from a normal cyclical recession. Goldman Sachs chief economist Jan Hatzius said that in fact, households appeared to be paying down debt largely as expected. “Most of the things that looked like they were improving six months ago still look like they are improving,” he said. Analysts generally expect the economy to pick up in the second half as supplies from Japan come back and car production resumes at some temporarily idled plants. “Parts producers are getting back online a lot quicker than anybody had thought,” said Macroeconomic Advisers senior economist Ben Herzon. The firm is forecasting 3.5 per cent overall economic growth in the second half of the year, though that is down from its projection at the beginning of the year of 4 to 4.5 per cent. Consumer spending has been lukewarm as people have cut back elsewhere to cover for higher prices at the pump. Although gas prices have eased in the wake of the International Energy Agency’s announcement that it would release some emergency stockpiles of oil, there is no guarantee prices won’t climb again as turmoil in the Middle East continues. In the meantime, customers remain wary.

“A lot of the factors that will give us a boost in the second half are largely temporary and will run their course at some point,” said Morgan Stanley chief economist David Greenlaw. At Young Ford, a car dealership in Charlotte, NC, operations manager, David McKinney, said that while sales had perked up in the spring, buyers were now holding back. “The psychology is going to take a little while to work through,” he said.

He added that consumers were having a hard time obtaining satisfactory loan terms. Many consumers, he said, were simply afraid to make big commitments while uncertainty hung like a haze over the economy. “We need to let the middle class catch the rabbit,” he said. “Tell them they can go to work 50 hours a week, go to the beach and send their kids to the college and they’ll just keep chasing the rabbit. But now they’re not even sure their job will be there.”

Economists are waiting to see whether the disappointing Labour Department report of hiring in May – which showed that employers added just 54,000 jobs, hardly enough to keep up with normal population growth, much less dent the unemployment rate – was an anomaly or the sign of a significant stall. Companies have given mixed signs of hiring plans. At United Parcel Service, the package delivery giant, volumes declined slightly in the first quarter, and the company is now only hiring seasonal workers or filling in jobs as people leave, not adding new positions.

Caterpillar, the large equipment manufacturer, has added 7,000 jobs in this country over the past year with new factories in Muncie, Ind., Winston-Salem, N.C.