INSIGHT: US Fed, manufacturers see recovery at risk

09 June 2011 16:26  [Source: ICIS news]

By Joe Kamalick

Increasing worries over US recoveryWASHINGTON (ICIS)--The US central bank chief this week painted a particularly glum picture of the tottering US recovery, warning that while the nation’s economy is improving at a moderate pace, “we cannot consider the recovery to be truly established”.

That sobering comment turned a Wall Street rally into a downturn on Tuesday and raised anew worries among some analysts about a possible double-dip recession.

The carefully modulated but largely negative speech by Federal Reserve Board chairman Ben Bernanke was in stark contrast to the outlook he gave before the Senate Banking Committee only some 90 days earlier.

Back on 1 March, a decidedly upbeat Bernanke told the Senate that “we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold”.

But hardly had Bernanke left the Senate chamber when a series of negative reports landed with trip-hammer regularity, pounding away at prospects for a strengthening recovery.

In his remarks this week to the annual International Monetary Conference, Bernanke noted that US GDP growth in the first quarter of this year fell to 1.8%, compared with a 3.1% gain seen in the last three months of 2010.

He said that US economic growth so far this year “looks to have been somewhat slower than expected”.

That’s putting it mildly, according to former chief White House economist Martin Feldstein.

Writing in the Wall Street Journal, Feldstein said of the first-quarter GDP: Two-thirds of that 1.8% went into business inventories rather than sales to consumers or other final buyers.”

“This means that final sales growth was at an annual rate of just 0.6% and the actual quarterly increase was just 0.15% - dangerously close to no rise at all,” he added. 

Feldstein, who served as chairman of the White House Council of Economic Advisers under President Ronald Reagan, said: “A sustained expansion cannot be built on inventory investment. It takes final sales to induce businesses to hire and to invest.”

Prospects for a significant increase in hiring took a major hit with last week’s workforce report, which showed US unemployment increased to 9.1% in May.

In its monthly employment data, the Labor Department said that only about 54,000 new jobs were added to the economy in May, a sharp contrast to gains that had averaged around 220,000 new hires in the three prior months.

The US needs to add about 150,000 new jobs each month simply to accommodate first-time workers entering the economy.  Economists say that the nation should generate 250,000 jobs each month if it is to meet new worker demand and bring back some of the 8m jobs lost in the great recession.

Referring to the May employment report, Bernanke said that “the jobs situation remains far from normal”.

While the US business sector “generally presents a more upbeat picture”, Bernanke said, many of those gains were attributed to demand in foreign markets that helped sustain US exports.

Looking forward, the Fed chairman said that much depends on consumer confidence and spending.

“As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters,” he said.

While household incomes have increased recently, consumers “are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence”, he said.

If, as Feldstein contends, consumer confidence and spending are waning, the US recovery will become even more dependent on the lifeline of exports.

But there too, US manufacturers warn, foreign economies are feeling the chill wind of uncertainty, and a possible downturn in US exports could drag the already-weakening US recovery into contraction and a new recession.

“Even as world output growth has resumed a technically healthy pace,” said the Manufacturers Alliance this week, “current challenges to the global economy are so remarkably wide and diverse that uncertainty itself has become an issue for the outlook.”

Alliance economist Cliff Waldman cautioned that “a portfolio of unknowns poses significant concerns to the worldwide recovery”, including volatile commodity, energy and currency markets along with uprisings in the Middle East and lingering supply chain effects of the Japan earthquake and tsunami.

“Recent growth data in the eurozone highlight the sharp dissonance between the moderate but uneven performance of the large economies in the north and the continued drag from the debt-ridden economies of the southern periphery,” he said.

The renewed and worsening fiscal and financial troubles of Greece, and also those of Portugal, Italy and Spain “are now, once again, creating fears about the economic stability of the eurozone as a whole”, Waldman said.

Waldman noted that GDP growth in non-US industrialised countries - which include eurozone nations plus Canada, Denmark, the UK, Sweden and Japan - “is expected to accelerate at an unusually slow pace” in the near term.

He said that industrialised nations other than the US could see a combined GDP growth of 1.8% in the second quarter and around 2% for the rest of 2011.

Developing nations’ economies - including China, Brazil and India - are expected to perform better, with GDP growth of 4.5% or better for this year, he said.

But even that pace is well below the 9% and 10% expansion rates that China and other emerging economies had delivered in pre-recession years.

The question is whether a weakening Europe and subdued growth among developing nations can demand enough US exports to sustain a US recovery if consumers stay on the sidelines in months ahead.

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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