Economy in U.S. to Cool

Economy in U.S. to Cool as Consumers Spend Less, Survey Shows

By Bob Willis and Kristy Scheuble

July 9 (Bloomberg) -- Economists trimmed their U.S. growth forecasts through the middle of next year, though not enough to show the recovery is in danger of faltering.

Growth in the world’s largest economy will average 2.8 percent from the current quarter through the second quarter of 2011, according to the median estimate of 52 economists surveyed by Bloomberg News from July 1 to July 8, down 0.1 percentage point from last month.

While recent housing, manufacturing and employment figures suggested the U.S. economy is more vulnerable, the survey shows the recovery will survive the effects of Europe’s debt crisis and China’s efforts to slow growth. With few signs of inflation, the Federal Reserve will wait longer than previously anticipated before raising interest rates.

“It’s not a falling-off-the-cliff scenario but it is a bit more cautious,” said Julia Coronado, a senior U.S. economist at BNP Paribas in New York. “There is going to be fallout from the European situation.”

Economists reduced their forecasts for consumer spending for this year as companies are slower to hire after the worst recession in seven decades.

Spending will average 2.4 percent this year, down from a 2.5 percent forecast a month ago. That compares with last year’s decline of 0.6 percent, the biggest decrease since 1974, and a three-decade average of 3.1 percent.

Economists marked down this year’s average growth pace to 3.1 percent, with the expansion cooling to an average 2.9 percent in 2011.

Unemployment Rate

Unemployment will be slow to fall after reaching a 26-year peak of 10.1 percent in October, signaling it will take years for the economy to recover the more than 8 million jobs lost during the latest recession.

“Some of the momentum that looked to be in the job market has faded,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

The jobless rate will average 9.6 percent in 2010 before falling to 9.1 percent in 2011.

The Labor Department reported last week that employment dropped by 125,000 workers in June, the first decline this year, because of layoffs of temporary census workers. Private companies added 83,000 people, a smaller-than-forecast gain that capped a month of data indicating weakness in industries from housing to manufacturing.

Wells Fargo Cuts

Companies are still firing staff to cut costs. Wells Fargo & Co., the fourth-largest U.S. bank by assets, plans to eliminate 3,800 jobs, or about 1.4 percent of its workforce, and close its consumer-finance branch network, the San Francisco- based company said this week.

“We have a store network, and that is closing,” David Kvamme, president of the unit, said in a phone interview. Also, “some of the businesses have been branded Wells Fargo Financial and we will rebrand them over time.”

The Standard & Poor’s 500 Index has fallen 12 percent from a 19-month high on April 23, while the euro has dropped 5 percent as investors worry that some cash-strapped European nations may default on their debt.

A July 1 report from the Institute for Supply Management showed manufacturing, which has been leading the recovery, expanded in June at the slowest pace this year as orders and exports cooled.

Housing Market

The number of contracts to purchase previously owned houses plunged 30 percent in May after a homebuyer tax credit expired, the National Association of Realtors said the same day. The drop was the biggest in records dating to 2001.

“The deceleration we’re seeing is being magnified by the fact that the policy incentives have pulled demand forward and now we’re suffering from the hangover,” said Steve Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York.

Job creation, the sluggish recovery and the growing budget deficit are likely to be top issues in November elections that will decide control of Congress.

“Government doesn’t have all the answers,” President Barack Obama said yesterday after touring the Smith Electric Vehicles factory in Kansas City, Missouri, where he highlighted a $32 million government grant to the plant. “What government can do is lay the foundation for small businesses to expand and thrive.”

Europe, China

A strengthening dollar and slower growth in Europe and China threaten demand for American exports. Goldman Sachs Group Inc. last week cut its forecast for 2010 growth in China to 10.1 percent from 11.4 percent as government restrictions on lending and real estate slow expansion in the world’s fastest-growing major economy.

The Fed last month said slowing inflation and the fallout from Europe’s debt crisis were among reasons it will maintain interest rates close to zero for “an extended period.”

The central bank’s preferred price gauge will rise 1.1 percent this year, the smallest gain in data going back to 1960 and the same as last month’s forecast in the Bloomberg survey.

Economists pushed back their forecast for the first rise in the fed funds target rate. The benchmark interest rate on overnight loans between banks will rise to 0.75 percent in the second quarter of 2011. Last month, they projected the first increase, to 0.5 percent, to occur in the January-to-March period. The rate has been in a range of zero to 0.25 percent since December 2008.