News Analysis: U.S. economic recovery loses steam amid uncertainties   2012-06-15 14:58:30            

WASHINGTON, June 14 (Xinhua) -- The U.S. economy, which gained momentum earlier this year, seemed to lose steam as the most recent economic data indicated that the lackluster recovery is weakening. With the debt crisis in the eurozone casting its shadow globally, the world's largest economy faces heightened downside risks.


U.S. job growth declined for the fourth straight month in May, and the unemployment rate ticked up for the first time in nearly a year.

The latest employment report showed that the private sector created a mere 69,000 jobs. Meanwhile, the jobless rate rose to 8.2 percent. The pace of job creation slowed to an average of 73,000 in April and May, in sharp contrast with an average monthly gain of about 225,000 for the first three months of the year.

The disappointing job data are only one indication of a slowdown. The Commerce Department cut its growth estimate for the first quarter to an annualized rate of 1.9 percent, down from its initial 2.2-percent estimate. The economy grew at a 3.0-percent rate in the fourth quarter last year.

The slowed growth and meager job creation are fueling concerns that the U.S. recovery may follow the similar pattern of last year, in which a strong growth early in the year receded in the spring and summer.

Some analysts say a four-month deceleration in hiring is hard to ignore. Others believe that the data is skewed by weather. Federal Reserve Chairman Ben Bernanke said the apparent slowing in the labor market may have been "exaggerated" by issues related to seasonal adjustment and the unusually warm weather this past winter.

Mark Zandi, chief economist at Moody's Analytics, said data in June should provide "a clearer picture" of the labor market's health, as payback from the warm winter has run its course.

"To keep pace with the growth in the working-age population, employers need to add between 90,000 and 100,000 jobs every month," said Gary Burtless, a senior fellow at the Brookings Institution.

However, there were indications that a recovery is underway. So far, the manufacturing sector has been expanding for 34 straight months. The housing sector, which has long been a drag on the recovery, has showed encouraging signs, including a pickup in sales and construction, improvements in homebuilder sentiment, and a stabilization of home prices in some areas.

Most forecasters say the U.S. economy may struggle through a tepid growth rate of 2 percent this year.


Economists are divided on whether recent data would lead to a revision of the economic outlook, but they agree that there is turbulence ahead.

Given the close economic and financial relations between the United States and Europe, the rekindled tensions in Europe would send ripple effects to the other side of the Atlantic, bringing trade down, dampening consumer and business confidence, and weighing on the financial market.

Greece's pending election outcome and the simmering banking crisis in Spain have added uncertainty regarding Europe's future. Once the crisis escalates, the shockwaves will be even stronger.

Another threat to recovery comes from fiscal unpredictability. A host of tax breaks is set to expire at year's end, while across-the-board spending cuts resulting from last summer's debt limit showdown are scheduled to be enacted early next year.

The Congressional Budget Office warned that the combination of spending reductions and tax increases, or "fiscal cliff," would drain about 607 billion U.S. dollars from the economy, and throw the country into recession in the first half of next year.

Furthermore, the federal budget deficit would soar once again, making the situation even more complicated. Treasury Secretary Timothy Geithner said the administration could manage its accounts till early next year.

Though the looming "fiscal cliff" is not so immediate, the unforeseeable fiscal future has already hindered the current recovery as small companies have begun to scale back hiring and consumers cut spending.

However, Democrats and Republicans are in a stalemate on how to defuse the fiscal bomb. Republicans insist on spending cuts without raising taxes, while Democrats refuse to cut spending without any tax increases. A "grand bargain" is expected after the election, and the negotiations could be tough as Geithner said there is "no plausible way" to solve fiscal problems without a balanced framework that "marries tax reform with broader spending reforms."


The grim data increased expectations of a further easing of monetary policy by the Federal Reserve. The policymakers will meet next week on June 19-20.

The Fed cut key interest rates to near zero in late 2008 and launched two rounds of quantitative easing to spur a stronger recovery. In January, it extended its policy guidance for ultra-low interest rates to at least late 2014, and has since then adopted a wait-and-see stance as economic indicators were mixed.

Though several members of the Fed's policy-making committee favored further action, Bernanke gave no hints on recent easing when he testified before Congress last week. He said economic growth has continued at a "moderate" rate so far this year, and is likely to continue at a moderate pace over the coming quarters.

According to the minutes of the last policy meeting, "several" policy members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.

Bernanke said the Fed officials were updating their views of the economic prospects, and the key question is whether the economic growth would be strong enough to bring down the unemployment rate.

The subdued inflation pressure, due to falling gas prices, gave the Fed more room for easing. If downside risks materialize, the Fed would offer a helping hand by giving a stronger signal on further monetary easing, or extending the "Operation Twist" which is due to expire at the end of June, or taking a more aggressive step by launching another round of asset purchasing.

However, just as Bernanke said, monetary policy is not a panacea for the ailing economy and the tools would bring "diminishing returns."

Special Report: Global Financial Crisis


Editor: Chen Zhi
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