Soft recovery expected

Business Economists Expect Soft Recovery

By Tom Barkley

U.S. economists trimmed their forecasts for the economy despite recent signs of stabilization, with the expected second-half recovery looking increasingly soft.

The National Association for Business Economics now projects a 1.8% contraction in the second quarter, bringing the cumulative fall in gross domestic product since the recession began in December 2007 to 3.7% — the biggest drop since the late 1950s.

NABE’s full-year outlook was downgraded to a 1.2% decline from a 0.9% decrease in a February poll, while growth in 2010 is now expected to be 2.7% instead of 3.1%.

“The survey found that business economists look for the recession to end soon, but that the economic recovery is likely to be considerably more moderate than those typically experienced following steep declines,” said NABE President Chris Varvares, who is also president of Macroeconomic Advisers, in the report.

The biggest drag on the economy is no longer the housing market or consumer spending, but a sharp pullback in business investment, the survey found. Profits are expected to slump 16% this year, which will likely weigh further on business sentiment.

Downside risks like job losses, poor credit conditions and falling home prices mean that consumers are also expected to remain cautious, according to the survey conducted between April 27 and May 11.

“The good news is that the NABE panel expects economic growth to turn positive in the second half of this year, with the pace of job losses narrowing sharply over the remainder of this year and employment turning up in early 2010,” he said.

The panel of 45 forecasters expect a total of 4.5 million jobs to be lost this year, pushing up the unemployment rate to 9.8% by year-end. The jobless rate hit 8.9% in April.

The consumer price index is expected to fall 0.7% this year, then rebound 1.7% in 2010.

NABE also expects the Federal Reserve to leave the target fed funds rate near zero until next spring and raise it to 1.25% by the end of 2010.

SOURCE: wsj.com