INSIGHT: US recovery continues but is vulnerable to risks

18 July 2013 16:59  [Source: ICIS news]

By Joe Kamalick

Moderate US recovery facing some risksWASHINGTON (ICIS)--The US economy continues its slow and moderate recovery, but top policymakers, economists and economic data suggest that the climb to normal growth will be long, sluggish and vulnerable to internal and outside risks.

In his regular semi-annual economic outlook report to the House Financial Services Committee, Federal Reserve Board chairman Ben Bernanke noted this week that the improving US housing sector “has contributed significantly to recent gains in economic activity”.

He said that increases in housing sales, home prices and residential construction are helping to boost employment, household finances and consumer spending.

He cautioned, however, that the housing recovery could be vulnerable if recently increasing home mortgage loan rates rise too fast. “It will be important to monitor developments in this sector carefully,” he told the panel.

The housing sector may be one of those internal risks that could impede the recovery. 

As Bernanke noted, improvements in home construction and sales have been major movers for the broader economy, so if housing should falter anew, so too might the overall recovery, tentative as it is.

Indeed, the US housing sector got an unwelcome reminder this week of how capricious the market can be. US new home construction tumbled by 9.9% in June from May, more than offsetting the 7% gain seen in May.

While the bulk of the housing construction downturn last month was laid to the nearly 27% plummet in apartment building work, housing starts in the key single-family home building sector also fell in June by 0.8%.

That was a marginal decline, to be sure, but not the direction associated with recovery.

Bernanke said that the US job market is improving, although gradually, and the nation has seen average monthly jobs growth of about 200,000 so far this year.

But the US economy needs to generate at least 150,000 new jobs each month just to accommodate population growth and new workers entering the market.

The nation added 175,000 new jobs in May, but despite that improvement the unemployment rate inched back up to 7.6% because long-unemployed workers returned to the job hunt. Some 195,000 jobs were added in June, but the jobless rate held steady at 7.6%.

Here too, simply a marginal increase or flat-line in the jobless rate is the wrong direction for recovery.

Economists say that to make any real headway in reducing the US unemployment rate, the country would have to generate some 300,000 jobs or more each month for multiple quarters. That pace does not seem to be on the near horizon.

As Bernanke said, “the jobs situation is far from satisfactory, as the unemployment rate remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high”.

The employment situation is not likely to improve much unless and until the underlying economy grows considerably faster than it has of late.

US gross domestic product (GDP) grew at only 1.8% on an annual basis in the first quarter this year. 

That is better than the nearly flat GDP growth of 0.4% seen in the fourth quarter of 2012, but the US first quarter performance was still below the pace set in two earlier quarters of 2012 - 2% in the first quarter 2013 and 3.1% in the third last year.

Bernanke said that he and economists at the Fed expect GDP growth to pick up in the second half this year, “eventually reaching a pace between 2.9% and 3.6% in 2015”.

Note that forecast is for 2015, not next year.

That longer term outlook for near-normal US GDP growth in 2015 suggests that the Fed expects economic growth to continue below normal for the rest of this year and into 2014.

In normal economic times, annual US GDP expansion would be expected to be in the 3%-3.5% range.

Bernanke cautioned that despite recent and moderate improvements, the economy faces some risks.

“The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery,” he said.

“More generally, with the recovery still proceeding at only a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated,” he added.

Prospects for global economic growth already are being diminished.

The International Monetary Fund (IMF) said this month that it expects global economic expansion this year to be no better than in 2012, with slightly more than 3% GDP growth worldwide.

In its earlier forecast for the global economy in 2013, IMF had predicted worldwide GDP expansion would be 3.25%.

In its downwardly revised outlook, the IMF cited weaker consumer demand in developing countries and prospects for a protracted recession in the eurozone as causal elements.

The IMF also lowered its expectations for the US economy for this year and next, saying that federal budget cuts and increased federal taxes would limit 2013 GDP growth to 1.9% instead of the 2.3% expansion it had forecast earlier.

($1 = €0.78)

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

By: Joe Kamalick
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