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U.S. Economy Stalls

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In my last blog, I cited emerging signs of a U.S. and global economic slowdown. I noted weak 1.8% GDP growth in the first quarter, and the likelihood it would continue into the second. Since then, we have been hit by a storm of weak economic data that makes it clear the economy has stalled at about 2% growth. This is far different than the 3-4% growth that Wall Street analysts and economists were forecasting only a few months ago.

The conventional wisdom, shared by Fed Chairman Ben Bernanke and most of Wall Street, is that this is just a temporary summer slowdown. The floods in the Midwest, the Japanese earthquake and nuclear meltdown, and other seasonal factors will simply pass. High demand in developing countries like China and Brazil, and manufacturing companies flush with cash, will provide the growth we need for a fall pick-up.

But I am skeptical. This recovery is mired down by structural burdens of a housing depression, a damaged financial system, unusually high unemployment and extraordinarily high public debt.

Heaven knows the ugliness of the May economic data suggested something much worse than a summer soft patch. Housing prices, as measured by the Case-Shiller index, have now declined by about a third, and the glut of foreclosures is threatening to drive housing prices lower. The sharp drop in the ISM Manufacturing Index from 60 to 53 raises questions about the strength of the manufacturing recovery. Finally, the measly addition of 54,000 jobs in May is about a third of what we need to reduce the unemployment rate.

These weak numbers have increased uncertainty and further eroded business and consumer confidence. A Washington Post-ABC poll shows disapproval of Obama's handling of the economy has risen, and 9 out of 10 respondents rate the economy in negative terms. Adding to this high uncertainty is the reality that the stimulative power of QE2 will decrease at the same time that Congress seeks a deficit reduction deal on the debt ceiling. Also, European debt problems continue to worsen. It is no surprise that the stock market has declined one percent a week for six weeks.

Government policy makers have only a few options to improve the short term economic environment -- such as extending the payroll tax cut, continuing the expensing of capital equipment, and repatriating foreign earnings back to the U.S. At the same time, we need a debt ceiling deal that includes a long term commitment to reducing entitlement spending.

Business leaders must understand and accept the slow U.S. growth environment and make plans to deal with it. On the growth side, this means continuing to expand into growing emerging economies, developing new products and marketing, and looking for strategic acquisitions. But we also need to continue to focus on productivity improvements and cutting costs, putting even more emphasis on the application of lean manufacturing throughout the production process, and a full scale assault on reducing noncore spending, which frequently accounts for about a third of typical manufacturing expenditures.