Fears of a US recession have grown throughout September, as a rallying fourth quarter is now unlikely
By Rich Miller, Bloomberg columnist
The US economy has slowed more dramatically than most economists expected just a few weeks ago, leaving it more vulnerable to a recession.
Forecasters at Goldman Sachs Group and New York-based AllianceBernstein Holding have cut their growth estimates for the just-ended third quarter to an annual rate of 2% or less. They do not foresee much, if any, improvement in the fourth quarter: auto-production cuts and slumping home sales are likely to overwhelm any boost the economy gets from lower gasoline prices, they said.
"We are decelerating fairly significantly,'' said Peter Hooper, a former Federal Reserve official who is now chief economist at New York-based Deutsche Bank Securities. He saw annual growth below 2% in the second half. The economy expanded at a 2.6% rate in the second quarter and 5.6% in the first.
Growth is getting closer to what St. Louis-based Macroeconomic Advisers president Chris Varvares describes as the 'stall speed', where an unexpected shock such as a terrorist strike or a hurricane might be enough to trigger a recession. A mathematical model of the economy developed by Federal Reserve economist Jonathan Wright puts the chances of a recession over the next year at about 40%.
With recession risks rising, some Fed officials are becoming uneasy about the outlook. While they remain on guard against the dangers of higher inflation, they said they are also paying more attention to the threats to growth.
"We are now seeing a slowdown,'' said Thomas Hoenig, president of the Kansas City Fed in a 27 September speech in Lincoln, Nebraska. "We have various concerns around that.'' Hoenig cut his own forecast of second-half growth to between 2% and 2.5%, from the 2.5% to 3% he predicted as recently as 15 September.
Most economists and Fed officials still expect the economy to avoid recession, helped by increased exports and business spending. Except for housing, "the rest of the economy is healthy and robust,'' Dallas Fed President Richard Fisher said in a 25 September speech.
That's helping the standing of George W. Bush, president of the Republican Party as it struggles to retain control of Congress in elections that take place 7 November, 11 days after the government delivers its first estimate of third-quarter growth.
A Bloomberg/Los Angeles Times survey published 21 September showed a jump in support for Bush's handling of the economy even as growth slowed. While the pain of slower growth, such as higher unemployment, takes some time to be felt, consumers were enjoying the more immediate pleasure of a 35-cents-a-gallon plunge in gasoline prices during the prior month.
Investors are focusing on the brighter side too. Stock prices have bounded higher, with the Dow Jones Industrial Average briefly surpassing its record closing high last week, on specu-lation the Fed will succeed in engineering a soft landing for the economy.
Bonds have also gained, pushing yields lower. The yield on the 10-year Treasury note fell to 4.63% as of 29 September from 4.73% at the start of the month. Investors are betting slower growth and easing inflation will let the Fed cut interest rates as early as next year.
"Investors are inherently predisposed to hope and pray for a soft landing,'' said Stephen Roach, chief global economist for Morgan Stanley in New York. Even so, he said, "the odds of a recession are growing.''
Less than a month ago, most economists expected growth for the rest of the year to remain close to the 2.6% pace of the second quarter. The median forecast of 81 economists in a Bloomberg survey published 8 September saw growth of 2.8% in the third quarter and 2.6% in the fourth.
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