AP survey: No recession but weakness will endure

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WASHINGTON (AP) — Another recession isn’t likely over the next 12

months. Neither is any meaningful improvement in the

economy.

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That’s the picture that emerges from an Associated Press survey of

leading economists who have grown more pessimistic in recent weeks.

They say high unemployment and weak consumer spending will hold

back the U.S. economy into 2012.

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Their gloominess comes at a time when Europe’s debt crisis

threatens to infect the global financial system. It also coincides

with an annual economic conference late this week in Jackson Hole,

Wyo., and speculation about whether Federal Reserve Chairman Ben

Bernanke will unveil any new steps there to help the

economy.

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Worries that another recession is nearing and that the European

crisis will spread have led to a roughly 15 percent drop in stock

prices in the past month. Economists say the Great Recession ended

in June 2009.

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What makes a solution so difficult is that the fear gripping

investors isn’t just a symptom of economic distress; it’s also a

cause of it. Sinking stock prices frighten consumers and

businesses. They then spend and invest less. Investors respond to

lower corporate sales by selling stocks, worsening the market

declines.

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Each day that the stock market sinks “puts another nail in the

coffin of the recovery,” says Beth Ann Bovino, senior economist at

Standard & Poor’s.

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“I had been saying it was a half-speed recovery; now, it’s a

quarter-speed recovery,” Bovino says.

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She is among 43 private, corporate and academic economists surveyed

this month by the AP. As a group, they are more downbeat than when

surveyed eight weeks ago. Among their conclusions:

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– The likelihood of a recession within the next 12 months is 26

percent. In June, the economists had put the likelihood at 15

percent.

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– The economy will inch ahead at an annual rate of 2 percent in the

July-September quarter and 2.2 percent from October through

December. Though stronger than the growth for the first half of

2011, that isn’t enough to lower the unemployment rate much, if at

all. And next year will barely be stronger.

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– Weak consumer spending poses a “major” risk to the economy. In

June, Americans cut their spending for the first time in nearly two

years. And consumer spending fuels about 70 percent of the

economy.

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– The unemployment rate will end this year at 9 percent and 2012 at

8.5 percent. Those rates are slightly less than July’s 9.1 percent.

But they’re more consistent with a recession than a

recovery.

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– The Fed’s efforts to keep interest rates at record lows may not

succeed in promoting growth or easing unemployment. But its

low-rate policies will likely boost stock prices.

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The economists do foresee economic growth, job creation, consumer

spending and home prices all rising over the next year. But the

gains they expect are so slight that many Americans won’t

notice.

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For months, the Fed and private economists had clung to hopes that

a slowdown in spring and early summer would prove temporary. They

initially blamed temporary factors – especially higher oil prices

and an earthquake and nuclear crisis in Japan that disrupted

factory production.

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But the economy has kept worsening. U.S. home prices remain

depressed. Job growth is weak. Workers’ pay is barely rising. The

economy grew at an annual rate of just 0.8 percent in the first

half of 2011 – much less than expected.

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The benefits of the government’s $862 billion stimulus are fading.

No more stimulus is likely. And in June, the Fed ended a $600

billion Treasury bond-buying program that was designed to help keep

rates low to spur spending and increase stock prices.

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Then Europe’s intensifying debt crisis and Congress’ standoff over

raising the debt ceiling undermined consumer confidence and spooked

the markets. Consumers and investors foresee more gridlock ahead as

a congressional committee seeks ways to cut at least $1.2 trillion

in debt.

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That means government spending, which normally helps economies

climb back from recessions, will likely instead restrain

growth.

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Earlier this month, the Fed pledged to keep short-term rates near

zero until mid-2013 if necessary to combat economic weakness. The

Fed also seemed to suggest it might be open to another round of

bond purchases.

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Many are waiting with anticipation for Bernanke’s speech Friday in

Jackson Hole at a conference held by the Federal Reserve Bank of

Kansas City. At last year’s conference, Bernanke set the stage for

the Fed’s $600 billion Treasury-buying program.

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But the economists in the AP survey are skeptical of the Fed’s

ability to improve economic conditions substantially.

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“The Fed can’t do anything at this stage that’s going to be

meaningful,” says Joshua Shapiro, chief U.S. economist at MFR

Inc.

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The Fed can influence interest rates, Shapiro noted, but “the level

of interest rates is not the impediment to growth.”

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A bigger obstacle is tepid demand across the economy. And even with

rates at record lows, many companies and consumers can’t or won’t

borrow. Consumers don’t want to take on more debt while the

economic outlook remains so dim and their job security

uncertain.

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The collapse in home prices means households have lost $7 trillion

in equity since 2005. They’re saving, not spending, to try to

rebuild their lost wealth, says Sean Snaith, director of the

University of Central Florida’s Institute for Economic

Competitiveness.

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Consumers have shed about $240 billion in debt, excluding real

estate loans, since the end of 2008, according to the Federal

Reserve Bank of New York.

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“We need to see the housing market stabilize,” Snaith says. “We

need to see some job creation. Until then, consumers are trying to

put nest eggs that turned into Humpty Dumpty back together again

… It’s just going to take time.”

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