Now that it’s perfectly obvious to everyone on the planet that the recovery is not much more than burnt toast, Economists Cut U.S. Growth Forecasts

A lack of jobs will shackle consumer spending and restrain the U.S. recovery more than previously estimated, according to economists polled by Bloomberg News.

Gross domestic product will expand at an average 2.55 percent annual rate in the last six months of 2010, according to the median of 67 estimates in a survey taken July 31 to Aug. 9, down from the 2.8 percent pace projected last month. Household purchases will climb at a 2.25 percent rate, compared with a 2.6 percent gain previously forecast.

“Simply put, job growth in the private sector hasn’t improved as we would’ve expected,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “The consumer continues to contribute to growth but at a subpar pace.”

“Unemployment is high, income growth has been pretty slow,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, who lowered estimates for growth and spending. “Household wealth is a lot lower than it was three years ago.”

“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement after meeting yesterday.

Revised Estimates Still Too Optimistic

Why was everyone so optimistic in the first place? There was no real reason for it. The answer of course is Fooled by Stimulus.

However, the economists still don’t get it. Second half GDP is likely to be closer to 0% than 2.55%. Negative GDP is plausible.

Did the Recovery Stall?

Not really. Caroline Baum explains in Economy Lost Momentum While I Was Pulling Weeds

The post-mortems on the July employment report made me realize I’d missed the recovery.

While I was watching my garden grow, the U.S. economy “lost momentum,” according to every news report I read or heard over the weekend. Somewhere between the budding of the peonies and the blooming of the rudbeckia, private-sector job growth downshifted.

Which brings me to the point: In order to lose momentum, the U.S. economy has to have momentum to begin with. If it had any, I missed it.

What we had was a government-prescribed course of amphetamines (to keep it up), antibiotics (to prevent infection) and antidepressants (to make it feel better). It endured regular steroid injections from both monetary and fiscal authorities. And it still has no real muscle.

Inventory accumulation accounted for more than half of gross domestic product growth in the fourth quarter, three- fourths in the first quarter and a little less than half in the second quarter.

The Federal Reserve’s near-zero percent interest rates and $2.3 trillion balance sheet, almost three times its pre-crisis level, haven’t translated into growth in broad money and credit. Banks are holding $1 trillion in excess reserves in their accounts at the Fed.

On the fiscal front, the government threw huge sums of money at the economy. It paid people to buy cars and homes. It paid them to weatherize their houses, maybe the same ones the government paid them to buy. It paid them to buy appliances for the houses the government paid them to buy. And it paid banks to modify mortgages.

What did we learn from this exercise? That, by golly, if someone were planning to buy a home anyway, an $8,000 tax credit acts as an inducement to do it that much sooner!

So, yes, if the goal is to put money in the pockets of people who will spend it, as Democrats in Congress are wont to say, then the $862 billion fiscal stimulus has been a smashing, but not lasting, success.

What Now?

The key question, as always is “What Now?”

Geithner, Obama, and Krugman all want more stimulus to keep the recovery going. However, as Baum explains, you can’t keep something going, that was never going in the first place.

Mike “Mish” Shedlock
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