Consumers Lose Confidence, as Do Once-Hopeful Economists
By Aaron Task | Daily Ticker – 40 minutes ago
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What a difference a month — and a brewing financial crisis — makes.
In early July, Moody's economist Mark Zandi told The Daily Ticker the U.S. economy was poised to "reaccelerate," predicting GDP growth close to 3% growth in the third quarter and approaching 4% in the fourth.
On Friday, Zandi lowered his forecast for U.S. GDP to 2% in the second half and just over 3% in 2012.
I don't mean to pick on Zandi, who is far from alone in slashing estimates: Economist surveyed by The WSJ now forecast 2011 growth of 1.6%, down from 2.6% in July; 13% say the economy is already in recession while 29% see a downturn in 2012, up from just 17% last month. Zandi too has raised the odds of a new recession to 33% from 25% only 10 days ago, CNN reports.
"We no longer expect a bounce in GDP growth during the second half of the year," writes IHS Global's chief U.S. Economist Nigel Gault, who on Friday lowered his 2011 GDP outlook to 1.6% from 2.5%, and 2012 forecast to 1.9% from 2.6%.
Gault cites a number of factors for declaring that "temporary shocks" is no longer a credible explanation for soft growth during the first half of 2011, including:
"Historical revisions to GDP," which showed growth tailing off to just 1.6% over the past four quarters.
Confidence in U.S. policymaking hitting new lows, a trend reflected in Friday's dismal consumer confidence data. "The artificial debt-ceiling crisis took the country to the brink of default," he writes. "And the resolution produced just more discretionary spending cuts, not progress on entitlements and revenues, which are the long-term keys to the problem."
Europe's sovereign debt crisis spreading beyond the so-called periphery while "European policymakers have been consistently one or two steps behind the markets in their reaction."
Just about every economist has drawn the same conclusion as Gault, mainly for the same reasons. This week's grim June trade deficit figures — at $53.1 billion, the highest since October 2008 — was another blow for optimists, as exports tumbled 2.3% and imports fell by 0.8% even as crude prices were still rising.
Economics: Now, With Even More Uncertainty!
But have some sympathy for these purveyors of the dismal science. This week also brought better-than-expected results on July retail sales while weekly jobless claims fell below 400,000 for the first time since early April. "Many of the most relevant coincident and lagging indicators continue to indicate growth — sluggish, unsatisfying growth, but growth nonetheless," as Dan Gross writes.
The tricky issue here is that the slashing of growth projections is both a function of, and contributor to, the recent upheaval in the financial markets. Although he doesn't foresee a double-dip, "financial markets create their own dynamics," Warren Buffett told Bloomberg TV last weekend.
If it's really the economy (stupid), recent drama in the financial markets can be attributed to the sharp downward revisions to growth estimates, which hit earnings forecasts which, in turn, prompt a reevaluation of the whole "stocks are cheap" valuation case for those using forward P/E ratios, as Henry and I discuss in the accompanying video.
As a wild week comes to a close, the market seems to be betting the worst has been "priced in," even as economists -- from optimists like Zandi to skeptics like Nouriel Roubini - are ratcheting up their forecasts for another recession.
Ahead of the market's rally on Thursday and Friday (but before the big swoon Wednesday afternoon), BTIG's Dan Greenhaus told The Daily Ticker stocks were a good buy, provided we're not heading for another recession.
Of course, that's a very big "if" -- one seemingly haunted by more uncertainty with each passing day.
