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Economic signs aren't pointing to recovery

WASHINGTON — Shoppers won't shop. Companies won't hire. The government won't spend on economic stimulus — it's cutting instead. And the Federal Reserve is reluctant to do anything more.

Without much to invigorate growth, the economy may be in danger of slipping into a stupor like the one Japan has failed to shake off for more than a decade. And Wall Street is spooked.

The Dow Jones Industrial Average on Wednesday barely broke an eight-day losing streak, finishing up about 30 points. Even with the gain, the Dow has fallen 828 points, or 6.5 percent, over the past nine trading days.

Stunned by news last week that the economy barely grew in the first half of 2011, economists are lowering their forecasts for the full year and recalculating the odds that the economy will slide back into recession.

Kurt Karl, chief U.S. economist at Swiss Re, has cut his 2011 forecast for growth this year to 1.8 percent from 2.6 percent. And he has bumped up the likelihood of another recession to 20 percent from 15 percent.

"The last week has made it much more likely that corporate profit estimates will be revised lower," said Nick Kalivas, a vice president of financial research at MF Global.

The government reported last week that the economy grew at an annual pace of 0.4 percent in the first quarter and 1.3 percent in the second. It's hard to see anything lifting growth to the 2.5 percent needed to keep unemployment from rising, let alone the 5 percent needed to bring the rate down significantly from June's 9.2 percent.

"Sales are what keeps the market moving higher, and there's not much demand when there's only 0.4 percent growth," said Andrew Goldberg, U.S. market strategist at JPMorgan Funds.

When the economy grows less than 2 percent over a 12-month period, it risks slipping into recession, says Mark Vitner, senior economist at Wells Fargo Securities. Over the most recent such period, the economy grew just 1.6 percent.

At the heart of the economy's problems are the debts that consumers built up during the early and mid 2000s. Many borrowed against the equity in their homes, convinced that house prices would rise forever.

When housing prices collapsed, people were left owing more than their homes were worth. Others charged up their credit cards. Now it's payback time, and Americans are spending less or spending cautiously as they slash their debts.

Companies are reluctant to hire until they're convinced enough customers are ready to buy their products or services. Corporate profits are booming, though, because companies laid off millions of workers, learned to operate more efficiently with smaller staffs and expanded in growing markets overseas.

In the past, the government has helped by spending on infrastructure projects or jobs programs. This time, it's cutting at all levels. In the second quarter, government cutbacks reduced economic growth by 0.2 percentage points.

More cuts are coming. The deal to raise the debt limit calls for $917 billion in federal spending cuts. Those won't do much immediate damage to the economy because they mostly kick in after 2013, but a special congressional committee is supposed to find at least $1.2 trillion more in savings over the next decade, and no one knows where the ax will fall.

Economic signs aren't pointing to recovery 08/03/11 [Last modified: Wednesday, August 3, 2011 9:53pm]
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