WASHINGTON -- The U.S. recovery is looking a bit shaky these days.
Predictions by the Bush administration and even Alan Greenspan, chairman of the Federal Reserve Board, of better times around the corner now seem doubtful, and bond market expectations of a slow and steady recovery have been pushed into the back corner.
Many private economists say the debate has shifted to how weak -- rather than how strong -- the recovery will be in the coming months. They also warn that the hance of a relapse into recession has grown.
As a result, many in the market expect that unless economic data take on healthier tones, Fed officials will soon be lowering short-term rates again. That could include dropping the discount rate to 5% from 5.5%.
Analysts expect to get a better fix on what is going on beginning with today's retail sales report from the Commerce Department.
"The Fed will be forced by reality to ease aggressively," said Philip Braverman, chief economist for DKB Securities Corp., in his latest market letter to clients. "If this is economic recovery, it is the most sluggish, fragile, and skittish recovery ever recorded."
Mr. Braverman has been consistently calling for big gains in the bond market on continued U.S. economic weakness, which he attributes in large measure to high debt levels by corporations and individuals and the general fragility in the financial system. Other analysts agree that interest rates will have to go lower to spur the economy.
"There are some pockets of strength, but the general sense seems to be that the recovery has lost some steam since the bounce back in the spring," said Gary Schlossberg, senior economist for Wells Fargo Bank in San Francisco.
"Right now we're sort of scraping the bottom and moving sideways," said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. "There really is no economic upturn right now."
The renewed pessimism largely stems from the Commerce Department's July unemployment report, showing that nonfarm payroll jobs fell for the second month in a row. Among other things, the report says, cuts by state and local governments are beginning to take hold, and it cites job losses in the service sector -- which generally enjoyed growth despite the recession.
The unemployment report was a shocker because it followed a whole series of other government statistics showing gains in industrial production, higher personal income and spending, and rising home sales. In addition, the government's index of leading economic indicators has risen five months in a row.
Many analysts say they are sticking with the view that the economy is climbing out of its hole. "Right now we are experiencing a step backward, but I would say in general that the recovery is continuing," said Mark Zandi, chief economist for Regional Financial Associates in West Chester, Pa. Unlike past recessions, business inventories are low and inflation is not a problem requiring the Fed to take a restrictive stance, Mr. Zandi noted.
"We're all becoming statistical hypochondriacs and react to the latest figures," said Norman Robertson, chief economist at Mellon Bank in Pittsburgh. Still, Mr. Robertson said, he remains uneasy about the economic outlook. "It is a statistical recovery, and I think for a lot of individuals and businesses, the recovery will be virtually indistinguishable from the recession."
The Federal Reserve itself acknowledged things were looking less promising in its so-called beige book that was issued last week in preparation for the Aug. 20 meeting of the Federal Open Market Committee. The report, which is based on a regular survey of business conditions in the 12 Federal Reserve Bank districts, says the U.S. recovery is still continuing, "but at a slow, uneven pace."
In fact, the report is laced with references to signs of economic weakness. Among other things, it notes a slowdown in home sales since spring, continued job losses, and no sign of any pickup in capital spending by businesses. Moreover, the report concedes that large regions in the United States such as New England and Southern California are still under water.
The Fed signaled its shift in view when it cut the federal funds rate last week to 5.5%, the first such move since April 30. "The Fed has changed its view of the economy since Fed Chairman Alan Greenspan delivered his Humphrey-Hawkins testimony less than a month ago," wrote James Winder, a senior money economist for Merrill Lynch Capital Markets, in a market letter released yesterday to clients. "At that time, the Fed chairman was optimistic that the economy had moved into an expansionary phase. There wasalso hope that as activity picked up credit would loosen up."
Robert Parry, president of the Federal Reserve Bank of San Francisco, made clear FOMC members' shift in thinking. Mr. Parry, often referred to in the industry as a hawk on inflation, said last week that Fed officials are more concerned now with "getting this economy moving," according to a report by Knight-Ridder Financial News.
Some economists believe the Commerce Department's preliminary estimate showing output of U.S. goods and services in the second quarter rose a scant 0.4% will be revised down to flag a sinking gross national product. For the third quarter, the outlook is distinctly better, but there is concern that the gains will be misleading.
Business inventories, which have been falling steadily, are not likely to show as much of a decrease in the third quarter. This technically would add to the GNP accounts. In addition, stepped-up automobile production could add as much as a full percentage point to GNP, but that hinges on whether Detroit adheres to its announced production schedules, which have historically been volatile.
"There's a worry that we're setting ourselves up for a poor fourth quarter," said Robert Dederick, chief economist for Northern Trust Co. in Chicago. "Consumer spending in July seems to have pooped out."
Indeed, consumer spending accounts for two-thirds of GNP, and it is unclear whether buyers will go back to the stores and open their wallets with any enthusiasm. Lower inflation should help boost real personal income, but consumer attitudes seem lackluster at best. The consumer confidence index of the Conference Board in New York, after bounding back to 81.1 in March from a January low of 55.1, has actually tailed down to a reading of 77.7 in July.
Moreover, many analysts say a variety of factors is making it more difficult to get the economy going again than in past recoveries. The personal saving rate, or savings as a share of disposable personal income, is scraping the bottom at 3.5%. The job cutbacks by state and local governments are creating wariness among workers who still have their jobs, and tax increases in many states are cutting spending power.
Banks continue to restrict loans, especially to commercial real estate firms, and remain reluctant lenders in general as they seek to build up their capital. Weak bank lending and credit demand are reflected in the sluggish money supply that Fed officials acknowledge is a concern. In July, the M2 measure of money actually fell.
The one consistent bright spot has been manufacturing, which continues to enjoy stepped-up exports to Europe and other major U.S. trading partners. Exports, production, and orders are all rising, according to the latest purchasing managers' survey for July. And with lean inventories, businesses stand ready to step in quickly and boost output if consumer demand picks up.
Given all the impediments to recovery, Fed policymakers have their work cut out for them, said Mr. Robertson. "I think the Fed is probably increasingly apprehensive about the weak economy and less apprehensive about inflation, and will ease again. But whether that's going to put the economy into very high gear is very questionable."
