A Recovery Trying to Keep Its Legs Suddenly Feels Woozy
The New York Times
July 12, 2004
By EDUARDO PORTER
Retail sales slowed in June. Auto purchases declined. Several technology
companies warned about weak software and hardware spending
at the end of the second quarter.
Less than three years since the United States emerged from a recession,
a patchwork of unexpectedly soft economic reports is raising doubts
about the vigor of the recovery.
"At every client meeting I have,'' said Ethan S. Harris, chief United States
economist at Lehman Brothers, "I'm asked whether a slowdown
has hit the U.S. economy."
Indeed, stock prices have faltered since the end of June,
as corporate earnings have disappointed investors. And bond prices have risen, as
evidence of economic fragility has allayed fears that inflation will accelerate.
The recent sluggish economic indicators have inspired a note of
caution in forecasts which until now had been unabashedly bullish.
"Economic data over the next several weeks are likely to follow the theme
of slower growth with continued inflationary pressures," wrote
Andrew Tilton, an Goldman Sachs economist, in a note to clients.
"In addition to a weaker trend of consumer spending, we expect some
modest deceleration in factory sector activity."
But, despite the scattered straws in the wind, most economists remain
confident that economic growth is not collapsing but is shifting to a
lower, more sustainable rate.
"The economy has come off its peak in the last couple of months,"
said Martin A. Regalia, chief economist at the United States Chamber of
Commerce. "People have dropped their forecasts to about 3.5 percent. That's still a pretty solid number."
As the nation has rebounded from the recession of 2001, the main
theme has been the ability of consumers to continue borrowing and
spending. Near record-low interest rates allowed homeowners to
refinance their mortgages, taking money out of their homes to pay for
renovations and all sorts of consumer durables. Dirt-low interest
rates allowed auto companies and others to offer zero interest-rate loans to
stimulate sales.
Eventually, this dynamic was expected to end, as the recovery took
hold and interest rates started rising. But even as debt-financed
consumption waned, most economists expected two new sources
of growth to kick in. First, a rising number of jobs would increase the
overall wage pie - helping maintain consumer spending.
Second, businesses, which spent the earlier part of the recovery paying down the
debt amassed during the dot-com boom, would again start investing in new equipment.
Rising oil prices, however, have complicated this switch. Spurring
a jump in inflation and taking a big bite out of the wallets of consumers,
rising energy prices have raised the question of whether, combined
with higher interest rates, they could depress consumer spending before
the new sources of growth could gather sufficient steam.
Signs of the end of consumers' exuberance have popped up in several areas.
Year-over-year growth in spending slowed to 4.1 percent in
May, in real terms, the slowest pace since January. And there is
anecdotal evidence of dreary sales in June. At Wal-Mart Stores Inc., the
nation's largest retailer, sales climbed 2.2 percent in the last month,
the smallest gain in over a year. At The Gap Inc., the clothing chain,
comparable store sales in June actually fell 2 percent after several months of strong results.
June was also sour for automakers. The General Motors Corporation
reported sales that fell 15 percent and the Ford Motor Company
reported an 8 percent drop from the same month a year earlier.
Citing the "difficult new vehicle retail environment that we are operating in,"
AutoNation Inc., America's largest automotive retailer, trimmed
its earnings forecasts for the second quarter.
The corporate sector has also shown some fragility. Business
investment had perked up this year after being absent during much of the
earlier recovery. But in the second quarter, corporate investment seemed to fall back.
New orders of nondefense capital goods, excluding aircraft, fell 2.1 percent
in April and 3.5 percent in May. And business spending on
technology has seemingly remained weak. Since the beginning of July, 32
technology companies have issued warnings of lower
second-quarter profits, according to Thomson First Call,
while only one has increased its earnings projections.
Against this weaker economic backdrop, the Labor Department's
report of an abrupt slowdown in job creation last month, which was
accompanied by a fall in the average number of hours in the workweek
and a meager increase in hourly wages, raised a question mark over
the standard account of the economy's evolution.
"Now the only real positive for the consumer is income and job
growth," Mr. Harris at Lehman said. "If the labor market really slows down it
would be a blow to the consumer and we could talk of growth slipping to below trend."
But it is still too early to make that call. Indeed, Mr. Harris and
most Wall Street economists view the June employment report as an
aberration, and believe job growth will return to a more robust growth
trend in July. If this is true, the economic recovery might do fine.
Other data foreshadowing emerging weakness might just be a function
of the changing sources of economic growth; not a signal of its
demise.
"We've gone from an economy on life support driven by super aggressive
'refi' to one driven by more traditional sources of consumer income,
which are jobs,'' said Robert J. Barbera, chief economist at ITG/Hoenig.
"In the transition, we may see a change in the sectors that do best.''
Many economic variables remain strong. Personal income,
a major driver of consumer spending, is growing. Mortgage applications are still
increasing. Home sales are at record levels. The Institute of Supply
Management's Purchasing Managers Index - historically an accurate
gauge of manufacturing activity - is indicating only a mild slowdown
in the second half from a strong period of expansion in the first.
Moreover, with interest rates still near their all-time lows it is harder
to build a case for a sudden economic retrenchment than to explain
continued growth.
The economy "is firing on all cylinders and the structure of interest
rates is still crazy easy," Mr. Barbera said. Given that backdrop, he
added, "I'm willing to cast a blind eye to the past 30 days' data."
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