Economists: Double-Dip Recession Unlikely, But Recovery Will Remain Weak
WASHINGTON — Another U.S. recession is not likely over the next 12 months. Neither is any meaningful improvement in the economy.
That's the picture that emerges from an Associated Press survey of leading economists who have grown more pessimistic in recent weeks. They say high unemployment and weak consumer spending will hold back the U.S. economy into 2012.
Their gloominess comes at a time when Europe's debt crisis threatens to infect the global financial system. It also coincides with an annual economic conference late this week in Jackson Hole, Wyoming, and speculation about whether Federal Reserve Chairman Ben Bernanke will unveil any new steps there to help the economy.
Worries that another recession is nearing and that the European crisis will spread have led to a roughly 15 percent drop in U.S. stock prices in the past month. Economists say the Great Recession ended in June 2009.
What makes a solution so difficult is that the fear gripping investors isn't just a symptom of economic distress; it's also a cause of it. Sinking stock prices frighten consumers and businesses. They then spend and invest less. Investors respond to lower corporate sales by selling stocks, worsening the market declines.
Each day that the stock market sinks "puts another nail in the coffin of the recovery," says Beth Ann Bovino, senior economist at Standard & Poor's.
"I had been saying it was a half-speed recovery; now, it's a quarter-speed recovery," Bovino says.
She is among 43 private, corporate and academic economists surveyed this month by the AP. As a group, they are more downbeat than when surveyed eight weeks ago. Among their conclusions:
_ The likelihood of a recession within the next 12 months is 26 percent. In June, the economists had put the likelihood at 15 percent.
_ The economy will inch ahead at an annual rate of 2 percent in the July-September quarter and 2.2 percent from October through December. Though stronger than the growth for the first half of 2011, that isn't enough to lower the unemployment rate much, if at all. And next year will barely be stronger.
_ Weak consumer spending poses a "major" risk to the economy. In June, Americans cut their spending for the first time in nearly two years. And consumer spending fuels about 70 percent of the economy.
_ The unemployment rate will end this year at 9 percent and 2012 at 8.5 percent. Those rates are slightly less than July's 9.1 percent. But they're more consistent with a recession than a recovery.
_ The Fed's efforts to keep interest rates at record lows may not succeed in promoting growth or easing unemployment. But its low-rate policies will likely boost stock prices.
The economists do foresee economic growth, job creation, consumer spending and home prices all rising over the next year. But the gains they expect are so slight that many Americans won't notice.
For months, the Fed and private economists had clung to hopes that a slowdown in spring and early summer would prove temporary. They initially blamed temporary factors – especially higher oil prices and an earthquake and nuclear crisis in Japan that disrupted factory production.
But the economy has kept worsening. U.S. home prices remain depressed. Job growth is weak. Workers' pay is barely rising. The economy grew at an annual rate of just 0.8 percent in the first half of 2011 – much less than expected.
The benefits of the government's $862 billion stimulus are fading. No more stimulus is likely. And in June, the Fed ended a $600 billion Treasury bond-buying program that was designed to help keep rates low to spur spending and increase stock prices.
Then Europe's intensifying debt crisis and Congress' standoff over raising the debt ceiling undermined consumer confidence and spooked the markets. Consumers and investors foresee more gridlock ahead as a congressional committee seeks ways to cut at least $1.2 trillion in debt.
That means government spending, which normally helps economies climb back from recessions, will likely instead restrain growth.
A committee from the National Bureau of Economic Research decides when recessions begin and end. They define recession as "a significant decline in economic activity (that) spreads across the economy" and lasts for a "few months to more than a year."
Earlier this month, the Fed pledged to keep short-term rates near zero until mid-2013 if necessary to combat economic weakness. The Fed also seemed to suggest it might be open to another round of bond purchases.
Many are waiting with anticipation for Bernanke's speech Friday in Jackson Hole at a conference held by the Federal Reserve Bank of Kansas City. At last year's conference, Bernanke set the stage for the Fed's $600 billion Treasury-buying program.
But the economists in the AP survey are skeptical of the Fed's ability to improve economic conditions substantially.
"The Fed can't do anything at this stage that's going to be meaningful," says Joshua Shapiro, chief U.S. economist at MFR Inc.
The Fed can influence interest rates, Shapiro noted, but "the level of interest rates is not the impediment to growth."
A bigger obstacle is tepid demand across the economy. And even with rates at record lows, many companies and consumers can't or won't borrow. Consumers don't want to take on more debt while the economic outlook remains so dim and their job security uncertain.
The collapse in home prices means households have lost $7 trillion in equity since 2005. They're saving, not spending, to try to rebuild their lost wealth, says Sean Snaith, director of the University of Central Florida's Institute for Economic Competitiveness.
Consumers have shed about $240 billion in debt, excluding real estate loans, since the end of 2008, according to the Federal Reserve Bank of New York.
"We need to see the housing market stabilize," Snaith says. "We need to see some job creation. Until then, consumers are trying to put nest eggs that turned into Humpty Dumpty back together again ... It's just going to take time."
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PAUL WISEMAN 08/23/11 05:02 PM ET Associated Press