July 29, 2011, 11:16 AM ET By Phil Izzo
Recovery? What recovery? Economic growth has largely stalled led by a depressed consumer and budget cutting state and local governments. Household spending came to a screeching halt as vehicle sales tanked in the spring. That created a sharp decline in durable goods spending.
Businesses continued to invest but the demand for equipment and software grew at the slowest pace in two years. And then there were state and local governments, where budget cutting has become de rigueur. The slicing and dicing reduced economic growth by over 0.4 percent point. That is not chump change and shows that my comment that there is no such thing as a free budget cut was not just a cute phrase. Thankfully, the trade deficit narrowed on solid increases in exports and weak imports. That kept growth above one percent. –Naroff Economic Advisors
–Recovery, we hardly knew ya! Economic growth is clearly flagging in the U.S., and the most troubling thing about it is that distress in Washington limits the policy response. As a result, we see a greater potential that the current slow patch could transition into a longer period of deeply disappointing results, and even a possible recession. While odds of such a recession are still modest, today’s results indicate an increasing probability. –Guy LeBas, Janney Montgomery Scott
–The U.S. is facing some major headwinds and challenges as it emerges from the worst recession in our lifetimes. Growth of this order is not only not enough to bring down the unemployment rate but would be coincident with an increase in unemployment. Fortunately, we do not expect this rate of growth to be repeated in the second half. However, and as we have been writing about lately, the current debate in Washington is having a negative effect on private sector activity and to the extent this continues, we have to believe that growth during the remainder of the year if not 2012 will be even lower than we originally thought. –Dan Greenhaus, Miller Tabak
–This data fits more neatly with the rise in unemployment over the past several years and weakness over the first half of this year better explains the weakening labor force and the lower pace of job growth over the second quarter. While it paints a bleaker picture of the past and demonstrates progress through the post financial crisis has been tepid and uneven, it also suggests that growth in [the third quarter] may set up better than expected as consumer spending bounces off its weakest change since the recession. –Eric Green, TD Securities
–The weak trajectory for real GDP growth in part reflects upward revisions to the GDP price index. In other words, the path of nominal GDP was little changed but the composition has shifted towards more inflation and less real growth. The latest household income accounts revealed a downward revision to the level of disposable income. In the past four quarters, this was larger than the downward revision to the level of consumption, resulting in a modestly lower near-term path for the savings rate. –Peter Newland, Barclays Capital
– Consumer spending was essentially unchanged versus [the first quarter]. With roughly 70% of real GDP not growing, and government spending shrinking and subtracting from growth in the span, it was up to capital spending and exports to do the heavy lifting in [the second quarter]. Partly offsetting these contributions, in addition to the aforementioned government sector, was an increase in imports. All in all, we do not believe that the composition of today’s report alters the likelihood that real GDP growth in the second half and into 2012 will be modest at best as the economy continues to struggle with the aftermath of the credit/asset price bubble. –Joshua Shapiro, MFR Inc.
–Anemic consumption, still declining state and local government spending, tepid business investment, and soft housing activity all combined to offset some strength in exports. Concerns about the weak labor market and rising food and energy prices continue to weigh on consumer confidence. Business sentiment is not more optimistic than consumers, in general, and likely to result in no more than moderate expansion of business investment. The more bullish forecasters that believe we are only experiencing a cyclical soft patch are likely to be disappointed when growth struggles to get above 2 percent in the second half of the year. –Kathy Bostjancic, The Conference Board
– The bigger question is what will happen when the irresistible force (unwind of auto sector dip and tailwind of lower energy prices) meets the immovable object (poor animal spirits and a government that seems hell‐bent on destroying the economy). This conflict was well‐established prior to today’s data, and the revisions do not in my mind change the calculus much. I remain optimistic for the third and fourth quarters, but I must admit that my concerns are building, mainly because I see a re‐emergence of anecdotes from businesses indicating a hunkering down due to the disastrous fiscal and regulatory policies of the federal government. There is a chance that these concerns dwindle quickly when the debt ceiling stalemate is resolved, but there is also a risk that the economy is going to remain stuck in second gear until the government adopts a more business‐friendly stance. –Stephen Stanley, Pierpoint Securities
– Growth should pick back up over the next few quarters. The recent decline in gasoline prices will provide a lift to consumer spending. There is still a great deal of pent-up consumer demand from the recession, although weaker job growth and consumer unease are concerns. Business investment should remain strong, as financing costs remain very low and profits are very high. Even business investment in structures seems to be turning around. Homebuilding appears to be coming off of its bottom, and will start making consistently positive contributions to growth. .. However, it is vital that Congress and the Obama administration quickly resolve the impasse over the debt limit. Failure to do so could shake business and consumer confidence, cause interest rates to move sharply higher, and lead to massive federal spending cuts that would quickly push the U.S. back into recession. Other downside risks include the European debt crisis and higher energy prices. –Augustine Faucher, Moody’s Analytics
– The economy was in far worse shape than previously understood prior to the supply chain disruptions linked to the Japanese earthquake and tsunami. The report provided an answer why overall economic output was broadly weaker than suggested by the slowdown in manufacturing between March and June of this year. Aaggregate demand simply buckled under the weight of rising costs of necessities in the first half of 2011. While, policymakers are likely to counsel patience given the extraordinary monetary and fiscal policies put in place to support financial market and overall economic activity, it is hard to make an argument that the economy will be able to generate enough momentum in the second half of this year to offset the coming drag from fiscal retrenchment and the end of the temporary payroll tax cut on December 31. If the risk of another global financial disturbance should policymakers not come to an agreement on lifting the debt ceiling in coming days, one would expect that the economy nearly slipping back into recession in the first half of 2011 will. –Joseph Brusuelas, Bloomberg
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