May 25, 2017

Economic Slowdown Is Expected, but It’s Seen as Fleeting

New data from the government due out Wednesday is expected to show that the economy came close to stalling during the spring quarter, which ran from April through June. But many experts say the latest slowdown is likely to be temporary. Buoyed by a healthier housing sector, a surging stock market and resilient consumer spending, they say, economic activity should rebound in the second half of 2013 and accelerate into 2014.

“We’ve been saying for some time that second-quarter growth would be the weak spot this year,” said Nariman Behravesh, chief economist at IHS. “This is the spring swoon. But I wouldn’t panic — there is a very specific reason for it, and it will start to wear off.”

“Housing has been sizzling and consumers are spending at a decent pace,” he added. “Businesses have held back so far, but will begin to get on board.”

But haven’t we heard that one before? The latest swoon looks a lot like the previous pauses that have prevented the economy from gaining much momentum since the recession ended in 2009.

Experts estimate that the economy grew at an annual rate of under 1 percent in the second quarter, half the already tepid pace of growth in the first quarter of 2013. Much of that weakness stems from the tax increases and automatic cuts in government spending that went into effect earlier this year, headwinds that should gradually ease in the quarters to come unless Washington makes things worse by cutting spending further or Congress and the White House send markets into a swoon by failing to agree on a painless way to raise the nation’s debt ceiling.

Federal Reserve policy makers, who are set to meet on Tuesday and Wednesday, will be closely analyzing these crosscurrents. The central bank has been purchasing $85 billion a month in Treasury bonds and government-backed mortgages — a program which the Fed’s chairman, Ben S. Bernanke, has hinted will be slowly wound down later this year if the economy proves strong enough.

The Fed is not expected to signal a change in direction when it issues its latest statement early Wednesday afternoon. The data on economic growth due out Wednesday morning, however, as well as the latest figures on employment that will be released by the Labor Department on Friday, could help determine whether the Fed begins tapering back as early as September or instead waits until December or even longer.

“The Fed will have a lot of information,” said Michelle Meyer, senior United States economist at Bank of America Merrill Lynch. “Our baseline scenario is that December is marginally more likely than September, but it is a very close call.”

Wall Street is intensely focused on when the Fed will begin easing back, and traders will be paying close attention to any change in the language of the Fed’s statement. In May and June, stocks fell after Mr. Bernanke seemed to suggest the tapering could begin soon.

Since then, though, Wall Street has bounced back and Mr. Bernanke emphasized in testimony before Congress earlier this month that the central bank was committed to bolstering the economy, easing fears of an abrupt tapering. In fact, he highlighted the risk that “tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect.”

Other questions are looming, too. Besides the issue of whether businesses will start investing at a faster pace, the recent rise in mortgage rates has some observers worried that the housing market could cool. The National Association of Realtors reported on Monday that its index for pending home sales dropped 0.4 percent in June, a sign buyers may be getting more cautious as borrowing costs increase.

More clues about the health of the housing sector will come on Tuesday, with the release of the latest figures in the S. P./Case-Shiller index for home prices. Economists are expecting the index for May to post a 12.3 percent gain over the same month a year earlier, a reflection of what has been a strengthening housing market in many parts of the country. The Conference Board is also scheduled to report its latest reading on consumer confidence on Tuesday.

Experts who are fairly optimistic in the long-term, like Ian Shepherdson, chief economist at Pantheon Macroeconomics, caution that Wednesday’s numbers on overall economic performance could look rather bleak.

“The second quarter was horrible, no matter how you slice it,” he said. “The crunch in government spending is holding back growth and it doesn’t just appear in the government component. It feeds pretty much into everything.”

Mr. Shepherdson is actually a bit more pessimistic about the current situation than many of his peers — he says he believes the economy grew at only 0.5 to 0.6 percent in the second quarter — but he emphasized that Wednesday’s report on gross domestic product was something of a wild card.

Inventory changes are hard to predict, as is the full impact of the cutbacks in Washington.

“We could be anywhere from minus 0.5 percent to plus 1.5 percent,” he said. “I wouldn’t be surprised if we saw a negative number.”

Even as economists on Wall Street, at the Federal Reserve and elsewhere study the data for the second quarter, government statisticians at the Commerce Department’s Bureau of Economic Analysis will also be undertaking a comprehensive revision of how they measure the economy itself.

The bureau will now count expenditures on research and development as akin to more traditional business investment, as well as make adjustments for the value of artistic property like movies and books. Pension plans will also be measured differently. It is the first revision of its kind since July 2009.

All together, these changes will affect reports of economic activity going back decades and are expected to increase the estimated size of the American economy by roughly $400 billion. That may be less than 3 percent of the nation’s $16 trillion in annual output, but it’s larger than the entire economy of dozens of countries.

And while no one will notice the difference in their own lives, in the world of economics, the bureau’s revision is a major event. “For numbers geeks like myself,” Mr. Behravesh said, “these changes are anticipated with great interest.”

Article source: http://www.nytimes.com/2013/07/30/business/economy/economic-slowdown-is-expected-but-its-seen-as-fleeting.html?partner=rss&emc=rss