By Veneta Nikolova
Columbia Journalism School, C’12
For all of the concerns over another recession, the American economy will probably grow slowly through the end of the year. Where it goes from there is another story.
When the government releases its preliminary estimate for the third-quarter gross domestic product next week, it is expected to show the nation’s output expanded at an annual rate of 2.5 percent, according to a recent survey of 69 economists by Bloomberg News. This movement would be significantly faster than the 0.4 percent rate in the first quarter and the 1.3 percent rate in the second one. The economy is expected to decelerate in the fourth quarter, marking 1 percent annual growth.
Consumption is expected to rise in the last quarter, boosted by the coming holiday season. A third round of quantitative easing and the extension of President Obama’s proposed payroll cuts could help sustain strong consumption through the end of the year. Government spending, currently around $3 trillion, is likely to increase by the end of the year to meet its $3.818 trillion target and further stimulate growth.
“It looks likely that economic growth in the second half of this year will be noticeably stronger, and inflation more moderate, than in the first half,” Fed Vice Chairman Janet Yellen said Thursday in a speech in Denver.
Despite such positive prospects, some economists see a reasonable risk of another recession. The median estimate of 51 economists surveyed by Bloomberg News this month suggests that the odds of a recession occurring over the next 12 months are 30 percent. Because economists tend to underestimate the scale of economic downturn, even such low likelihood of recession can appear worrisome.
If consumer consumption, which generally accounts for about 70 percent of economic activity and is a key driver of growth, remains subdued, the economy will slow down. In a vicious circle, consumers who are anxious will save more rather than spend, causing businesses to contract, in turn, reducing overall output and putting the economy at risk of a double-dip recession.
“The economy is slogging through the mud and occasionally hitting stretches of dry pavement,” said Federal Reserve Governor Daniel Tarullo in a speech at Columbia University last night.
Aside from weak consumer confidence, an “acute problem in labor” and housing markets are serving as drags on the economy, Tarullo said.
The high rate of unemployment — above 8 percent for 32 months — and the average joblessness period of 40.5 weeks seem particularly troublesome. People who have been out of the workforce for a prolonged period may no longer have the skills to find comparable work again. The declining labor participation rate and the increasing mismatch between the skills of workers and the needs of employers paint an even darker picture.
Many Americans have lost an enormous amount of wealth and confidence in the economy because of the collapse of housing prices. “Housing continues to hang like an albatross around the necks of homeowners and the economy as a whole,” Tarullo said.
Measures aimed at stimulating consumer demand could be on the horizon if the economy does not strengthen on its own. The Fed is leaning toward more large-scale purchases of mortgage-backed securities, according to at least one policymaker.
“The aggregate demand effect [of these repurchases] should be felt not just in new home purchases, but also in the added purchasing power of existing homeowners who are able to refinance,” Tarullo said.
Dallas Fed President Richard Fisher contends the Fed has exhausted its measures to revive the economy with interest rate targets close to zero.
Despite some division among its ranks, the Fed appears determined to encourage borrowing by pushing the price of mortgage-backed securities up to help bolster the economy. The effect will be to nudge consumption, encourage risk-taking and investment, increase growth and ultimately help restore lost consumer wealth.
Although such steps could spur inflation, a worry of those like Fisher, inflation does not appear to be a major concern at the moment. The consumer price index for all urban consumers rose 3.1 percent for the six months ended in September, 1.6 percentage points below the rate for the six months ended in March.
Though the jobs picture is weak, there are signs of encouragement. The unemployment rates in 36 states either fell or remained unchanged in September, while 14 states experienced increases, the Bureau of Labor Statics reported today. The number of new applications for unemployment benefits has also fallen to a six-month low, which coupled with other encouraging data, support the idea that the economy is not slipping into another recession.
Retail sales grew 1.1 percent in September, the most in seven months, beating projections of 0.7 percent. Factory production also climbed. Auto sales also showed significant improvement last month, rising more than expected after four months of disappointing results. With corporate earnings coming in better than expected, fears in the market seem to be subsiding. The S&P 500 has gained 13 percent this month.
Although it is hard to say whether another round of easing will have the desired effect on consumption and the overall economy, “there is much that government policy — including monetary policy — can still do,” Tarullo said.
This article was written for the Columbia Journalism School’s seminar on business and economics journalism in the fall of 2011.