U.S. Economy to Stall as Spending Cools, Survey Shows (Update2)
By Shobhana Chandra and Kristy Scheuble
April 9 (Bloomberg) -- Economic growth in the U.S. will come to a halt in the first six months of 2008 as consumer spending cools, a Bloomberg News survey showed.
The world's largest economy will not expand at all from January through June, according to the median estimate of 62 economists surveyed from April 2 to April 8. A majority now projects the U.S. is, or will soon be, in a recession.
Job losses, falling home values and credit restrictions are plaguing consumers already burdened by soaring food and gasoline bills. Federal Reserve Chairman Ben S. Bernanke, who conceded for the first time last week that the economic expansion may end, will cut interest rates again, the poll showed.
``The economy is not going anywhere in the first half,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. ``The American consumer is pretty dismal right now. We're in the middle of a recession and we've got another three to six months to work our way out of it.''
The deepest reductions came in the outlook for the second quarter as economists slashed the growth estimate to zero from last month's projected 0.5 percent annual pace.
For all of 2008, the economy is forecast to expand 1.3 percent, the smallest gain since 2001, during the last recession.
Increases in fuel prices and the unexpected pickup in firings since the start of the year explain the downgrade.
``Those two things are hitting the consumer hard,'' said Stephen Stanley, chief economist for RBS Greenwich Capital Markets in Greenwich, Connecticut. ``Demand is deteriorating rapidly.''
Consumer Outlook
Consumer spending, which accounts for more than two-thirds of the economy, will rise at an average annual pace of 0.5 percent in the first half of the year, the survey showed. That would be the smallest two-quarter gain since purchases dropped in the six months that ended March 1991.
Spending will pick up in the latter half of 2008 as Americans receive tax-rebate checks under the $168 billion stimulus package passed by Congress and the administration. Still, the plan is unlikely to have a lasting effect as debt- ridden consumers will probably use some of the money to pay off loans or shore up savings.
``The consumer has virtually ground to a halt,'' said Nariman Behravesh, chief economist at Global Insight Inc., a forecasting firm in Lexington, Massachusetts. ``We may see a bump up in third- and fourth-quarter growth, then a drop-off before a real recovery kicks in.''
Recession Odds
The odds the economy will be in a recession in the next 12 months jumped to 70 percent from 50 percent in the March survey, according to the median forecast.
The International Monetary Fund's World Economic Outlook released today projects the U.S. economy ``will tip into a mild recession in 2008 as a result of mutually reinforcing housing and financial market cycles, with only a gradual recovery in 2009.'' For all of 2008, the IMF forecasts U.S. growth of 0.5 percent, down from its previous forecast of 1.5 percent.
Minutes of the Fed's March 18 policy meeting released yesterday showed policy makers and staff economists at the central bank are even more pessimistic.
``Many participants thought some contraction in economic activity in the first half of 2008 now appeared likely,'' the minutes said. ``Some believed that a prolonged and severe economic downturn could not be ruled out.''
Fed's Forecast
Fed staff economists told policy makers they had ``substantially revised down'' their forecast to show a first- half contraction in gross domestic product.
Bernanke echoed their concern when he told Congress on April 2 that the economy is going through a ``very difficult period.''
The Fed will trim the benchmark rate by a half point to 1.75 percent by June and keep it there the rest of the year, the Bloomberg survey showed. Policy makers lowered the rate three- quarters of a point in March, bringing the total reduction so far this year to 2 percentage points, the fastest drop in borrowing costs in two decades.
``The Fed will stay on the side of being aggressive, doing more rather than less,'' RBS Greenwich Capital's Stanley said.
The S&P/Case-Shiller index showed property values in 20 metropolitan cities fell by the most on record in January as the residential real estate slump extended into its third year.
Consumer confidence as measured by Reuters/University of Michigan dropped to a 16-year low in March and the average price of regular gasoline reached a record $3.34 a gallon this week.
Employment, formerly the main pillar of support for consumers, is now a liability. Payrolls fell by 80,000 in March, the most in five years, and the jobless rate jumped to 5.1 percent. Unemployment is likely to reach 5.5 percent by the end of the year, the survey showed.
``This is really the most challenging environment we've faced in recent memory,'' said Gary Schlossberg, a senior economist at Wells Capital Management in San Francisco. ``The weakness seems to be broad based.''
To contact the reporters for this story: Shobhana Chandra in Washington at schandra1@bloomberg.netKristy Scheuble in Washington at kmckeaney@bloomberg.net
Last Updated: April 9, 2008 10:23 EDT |
