Rebates Won
The Bush administration's tax rebates won't prevent the U.S. economy from stagnating in the second quarter as soaring food and fuel bills hurt consumers, a Bloomberg News survey showed.
“Consumers have gone into the bunkers,'' said Ken Goldstein, an economist at the Conference Board, the New York- based research group that tracks confidence. They “fear that their budgets are getting squeezed tighter and tighter.''
The economy will grow at a 0.1 percent annual rate from April to June, the least since the 2001 recession, according to the median estimate of 54 economists surveyed from May 2 to May 8. Household spending may rise at a 0.5 percent pace, half the first quarter's gain and the smallest increase in 17 years.
Economists also said the economy would grow less in the second half of the year than forecast last month, even as the odds of a recession came down. After paying the higher costs of food and gasoline, the $117 billion in rebates may leave little extra as individual taxpayers are limited to $600.
“A $600 check isn't enough to turn things around,'' said Goldstein. “It took so much to wilt consumer confidence, that it's not going to be rebuilt real fast.''
The survey median showed the economy will expand at a 1.5 percent pace in the fourth quarter, following a 1.6 percent growth rate in the previous three months, when most of the money returned by the government is likely to be spent. The U.S. grew at a 0.6 percent pace in the first three months of 2008.
“The rebates won't generate a sustained increase in spending,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. “By the fourth quarter, growth will look disappointing to most people.''
Spending Slowdown
After accelerating to a 2.3 percent annual pace in the third quarter, gains in consumer purchases will slow to 1.6 percent in the last three months of the year. Spending rose at an average rate of about 3.4 percent over the past decade.
Federal Reserve policy makers will keep the target interest rate unchanged at 2 percent until the second quarter of next year, the survey showed, to allow time for the 3.25 points of reductions since September to take effect.
Economists polled remained on recession watch, even as the odds of a U.S. contraction now, or within the next 12 months, fell to 55 percent from 70 percent in the April survey.
“I don't think we're totally out of a bad situation that could easily get worse,'' said Oscar Gonzalez, an economist at John Hancock Financial Services in Boston cashadvance.com. “We're walking along the edge'' of a recession, he said.
More Unemployment
One risk is the labor market may worsen. The unemployment rate will rise to 5.5 percent by the end of 2008, from 5 percent in April, the survey showed. The economy lost 260,000 jobs in the first four months of this year, and companies remain reluctant to hire.
Cash-strapped Americans are accumulating credit-card and other forms of debt. Consumer borrowing jumped more than double the amount economists forecast in March, while the share of banks making it tougher for companies and consumers to borrow approached a record in the past three months, according to Fed reports this week.
Shoppers are turning to discount chains to stretch their paychecks. Wal-Mart Stores Inc., the world's largest retailer, said sales at outlets open at least a year may rise as much as 2 percent in May, excluding fuel. That's after a 3.2 percent gain in April that was larger than they anticipated.
Still, even Bentonville, Arkansas-based Wal-Mart has noticed a change in buying patterns.
Month-End Sales
“The economy continues to get tougher and the paycheck cycle is more pronounced for customers than in past months,'' Eduardo Castro-Wright, chief executive officer of Wal-Mart's U.S. stores, said yesterday in a statement. “As money gets tighter for them toward the end of the month, sales drop more than we have seen in the past.''
Purchases of expensive goods are plummeting. Sales of cars and light trucks in April slid to a 14.4 million annualized rate, the lowest since 1998, according to industry figures.
The jump in inflation may not go much beyond record prices for gasoline and the rising cost of food, economists said. Prices tied to consumer spending and excluding food and fuel, the Fed's preferred measure, will rise 2 percent in 2008, according to the survey median, the smallest gain in five years.
Compared with prior surveys that typically reflected more than 60 responses, the May poll was based on fewer estimates, indicating economists' projections may be in flux.
“The uncertainty is palpable,'' said Martin Regalia, chief economist at the U.S. Chamber of Commerce in Washington. “We're flirting with a recession, but it's just not clear. If we stayed right where we are, it's almost a coin flip.''
Filed under: economics, technology by Finance Boss