U.S. GROWTH OUTLOOK STUCK IN NEUTRAL / THE WALL STREET JOURNAL

ECONOMY

Updated July 21, 2013, 8:57 p.m. ET

U.S. Growth Outlook Stuck in Neutral

GDP Expectations Dialed Back as Retailer, Restaurant Sales Falter

By BEN CASSELMAN

The long-anticipated acceleration in the U.S. economy has been put on hold once again.

Disappointing economic and corporate-earnings reports in recent weeks have dashed hopes that the U.S. was at last entering a phase of solid, self-sustaining growth. Instead, while economists expect a modest second-half pickup in growth, few are predicting the kind of substantial rebound needed to quickly bring down unemployment, raise wages and insulate the U.S. from economic threats abroad.
 

There also are signs that consumers—whose spending has helped prop up the economy for much of the past year—are beginning to tighten their belts. Retail sales grew a paltry 0.4% in June, Commerce Department figures showed, and would have been even worse if higher gasoline prices hadn't forced drivers to spend more at the pump.

"This year is proving to be more challenging than we had originally planned," Howard Levine, chairman and chief executive of discount retailer Family Dollar Stores Inc., told investors earlier this month. "The consumer is just more challenged than we had anticipated."
 

Sales at restaurants—a key source of recent job growth, adding more than 150,000 positions over the past three months—tumbled last month, suggesting consumers could be pulling back on discretionary spending.
 

The unsteady economy, both in the U.S. and internationally, is affecting companies' bottom lines—results have been mixed as firms begin reporting second-quarter earnings. Industrial giant General Electric Co. GE +4.41%reported lower global revenues but higher profit and said sales in Europe had "stabilized." Appliance maker Whirlpool Corp. WHR +7.99%posted sharply higher profits, but earnings in the technology-sector have generally fallen short of expectations.
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The Federal Reserve is watching the data closely as it decides when to begin winding down its $85 billion-a-month bond-buying program. Many Wall Street analysts expect that process to begin at the Fed's mid-September meeting.

But in Senate testimony on Thursday, Fed Chairman Ben Bernanke said it was too early to make a decision and reiterated that the timeline will depend on how the economy performs in coming months, warning that the economy "remains vulnerable to unanticipated shocks."
 

Economists now believe the economy grew at an annualized rate of just 1.5% in the second quarter, according to The Wall Street Journal's latest survey of forecasters. The economists have become markedly more pessimistic since June, when they estimated a 1.9% pace for second-quarter growth, and several forecasters now believe the growth rate fell below 1% for the second time in the past three quarters.
 

Such false dawns have been a recurring theme in a recovery filled with rosy projections that last only until the next crisis or unforeseen roadblock appears. Some experts said the latest disappointments should come as little surprise: Exporters and manufacturers have been hit hard by weak overseas economies, consumers are still adjusting to tax increases that kicked in early this year, and government spending has fallen due to the "sequester" budget cuts.
 

"I don't see these numbers as being surprisingly lousy," said Tara Sinclair, a George Washington University economist. "I would rather say that the forecasts we saw earlier were overly optimistic."
 

 

 

Not all the news is so grim. The housing market continues to show signs of recovery despite a recent rise in mortgage rates and a slowdown in home building in June. Measures of consumer confidence have generally stayed high despite recent financial-market gyrations. And critically, the slowdown elsewhere in the economy hasn't yet led to a pullback in hiring, which has held steady at about 200,000 new jobs per month in the first six months of the year. 

Economists aren't sure what explains the seeming disconnect between hiring and economic growth. One possibility: Employers held off on hiring amid last year's economic uncertainty and are now trying to catch up. 

That is what happened at Fastenal Co. The Winona, Minn., seller of bolts, screws and other industrial and construction supplies was slow to hire last year, which left the company without enough salespeople, according to CEO Will Oberton.  

Now the company is making up for lost time, hoping to hire 100 to 150 people a month for the rest of the year. 

"We got behind on hiring people, or actually we threw the brake on a little bit," Mr. Oberton said. "We need to add the people even if the economy is slow." 

But the hiring doesn't suggest Fastenal sees evidence of an economic rebound. "We aren't seeing any signs, or even any anecdotal stuff," Mr. Oberton said. "It seems like we've been bouncing along for quite some time."

That kind of catch-up hiring can't continue indefinitely. At some point, either growth has to pick up or hiring will slow.

Economists do expect modestly faster growth in the second half of the year: at a 2.4% annual rate in the third quarter and 2.7% in the fourth, according to the Journal survey. But even if those projections hold up, that would suggest another year of anemic growth around 2%, not enough to bring down unemployment quickly.

 

And the projections may not hold: Ian Shepherdson, chief economist of the research firm Pantheon Macroeconomics, noted that the U.S. is expected to run up against its congressionally mandated borrowing limit sometime this fall. Another round of debt-ceiling brinkmanship, Mr. Shepherdson said, could lead small businesses in particular to pull back hiring.

"While I think the third quarter will be better than the second, I'm nervous about the fourth," Mr. Shepherdson said.

 

Others are more optimistic. Joseph LaVorgna, chief U.S. economist for Deutsche Bank in New York, pointed to several factors that suggest the economy is on firmer footing than it has been in years: stronger household balance sheets, a rebounding housing market and some early signs that state and local governments are hiring again after years of cuts.

 

But Mr. LaVorgna said that after years of false starts, he doesn't blame Americans for greeting such claims with skepticism. "There is still a leap of faith," he said. "It seems like we always have an excuse or a reason to explain why the economy's weak."

 

 

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