Coming Months Key for Economic Expansion
Jun 17 12:02pm ET
By Caren Bohan
WASHINGTON (Reuters) - The once-vigorous U.S. economic expansion -- which turned 10 years old in March -- is still alive, but economists say it is hanging by a thread and the next few months should prove decisive for its survival.
Forecasters are cautiously optimistic about a rebound, albeit a mild one, in the world's largest economy later this year. They say the pickup will get help as the full force of the Federal Reserve's aggressive interest-rate cuts kicks in and consumers start to cash the tax refund checks they will start receiving from the government this summer.
In the meantime, though, the situation could be dicey. Corporate profits are sagging, factories are in a deep slump and the job market is quickly losing its luster.
The business-investment boom that powered high growth rates in the late 1990s has been unraveling and economists wonder if slippage in the pace of consumer spending will be the next shoe to drop.
"We're on the brink," said Kurt Karl, chief U.S. economist at Swiss Re in New York. He added that "it's going to be a squeaker" as to whether the economy records a contraction in gross domestic product.
Business cycle expert Victor Zarnowitz agreed: "The second and third quarters might decide whether we are in a slowdown or a recession."
Zarnowitz, a consultant to the Conference Board research group, sits on a panel of the National Bureau of Economic Research that is viewed as the official arbiter of whether recessions have occurred. But it looks at such events from a historical perspective and has seen no cause yet to investigate the possibility of one.
Although economists look to the NBER to determine the exact dates of business cycles, they loosely define a recession as two straight quarters of falling GDP.
HOLDING ABOVE ZERO
According to statistics on first-quarter GDP, the latest ones available, growth is still above zero though not by very much.
GDP in the first three months of the year grew at an annual rate of 1.3 percent, a big deceleration from the 4-percent-plus rates recorded in the late 1990s.
The Commerce Department will not have an estimate of second-quarter GDP until late July. But economists said the signs so far suggest it will be at least as anemic as the first quarter, if not weaker. A handful of analysts believe it could be negative.
The closely watched Blue Chip consensus forecast of private economists pegs economic growth in the April-to-June quarter at a slim 1 percent.
A red flag that has some experts concerned was the Labor Department's May employment report.
Even though Labor's poll of U.S. households showed the unemployment rate fell to 4.4 percent from 4.5 percent, its survey of employers showed a drop in total hours worked in the first two months of the second quarter. According to Blue Chip's calculations, hours worked were down at an annual rate of 1.5 percent.
That was unnerving to economists who sometimes look at aggregate hours worked as a proxy for GDP.
"It's very difficult to get significant growth in economic output when there is a decline in hours worked," said Ken Matheny, economist at Macroeconomic Advisers in St. Louis.
Still, Matheny said an increase of 1 percent in second-quarter GDP was a "pretty reasonable" estimate.
"It's possible we could get a negative quarter of GDP but I wouldn't expect it," Matheny said.
WILL CONSUMERS KEEP SPENDING?
In coming months, much will depend on the behavior of consumers, whose spending fuels two-thirds of economic growth, and is expected to offset some of the weakness in the business side of the economy.
Consumer spending grew 2.9 percent in the first quarter, a reasonably good showing amid a severe economic slowdown and in the aftermath of sharp declines in the stock market.
Companies, on the other hand, have spent much of the year trying to get bloated inventories back into balance with demand. After a period of over-investment in high-technology equipment, firms are also curbing equipment spending.
A big worry is that as companies try to beef up profit margins, they will continue to lay off large numbers of workers. As more workers lose their jobs, spending on homes and durable goods, such as cars, could take a hit.
In light of that and other risks, analysts believe the Fed has a little more interest-rate trimming to do. Meanwhile, the medicine the Fed has already administered -- the 2.5 percentage points in rate cuts -- will work its way through the economy.
"This process is still unfolding," Zarnowitz said. "Even if a recession were to occur, it might not be a complete disaster if helps resolve some of the imbalances that have built up in the economy."
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