- - Thursday, June 23, 2011


Over the past few weeks, a number of economists have cut their domestic growth expectations following a string of weaker-than-expected data. Well, the notion of slower growth is more or less official now as the Federal Reserve on Wednesday downgraded its projections for U.S. economic growth and unemployment.

The Fed now sees the U.S. economy expanding by 2.9 percent in 2011 versus its April forecast that called for 3.3 percent growth and its January forecast of 3.9 percent growth this year. In addition to the negative revision to its 2011 forecast, the Fed also reduced its growth outlook for 2012 to 3.7 percent or slightly less versus the prior projection of better than 4.0 percent growth in 2012.

Despite those revisions downward, those forecasts offer a rosier outlook than some others, including that from the International Monetary Fund, even though Fed Chairman Ben S. Bernanke described the reductions in the Fed’s economic-growth forecasts as “fairly significant.” More disconcerting is that the Fed doesn’t “have a precise read on why this slower pace of growth is persisting,” according to Mr. Bernanke. With already two cuts to the Fed’s forecast and no resolution as yet to the federal debt ceiling and deficit, as well as looming issues in Europe, one has to consider that economic growth this year could be closer to the 2.5 percent that the IMF is forecasting for the U.S. in both 2011 and 2012.

I say that in part because the Fed is tracking to finish its $600 billion program of debt-buying later this month. As with several other programs implemented to put the economy on a growth trajectory over the last few quarters — housing tax credits, “cash for clunkers” and such — the question that needs to be asked is whether these programs addressed the structural nature of the problem.

The short answer is no, because none of those programs laid the groundwork for sustainable growth that would ripple across the domestic economy, foster real job growth and get consumers spending. If anything, those programs pulled what demand there was forward by several months.

In terms of growth and job creation, many tend to look at weekly jobless claims and the monthly employment report. However, there are indicators, such as capacity utilization, that suggest robust hiring is likely to be put off near-term. While capacity-utilization levels have improved from the 2008-2009 low, according to the Federal Reserve Board, the May 2011 reading of 76.7 remains well below the 1972-2010 average of 80.4.

In more plain language, there is enough slack that companies are not feeling the pressure to hire more workers because their current staff can keep up with demand. In the past, when capacity utilization is well above 80 percent, companies added new plants and new workers.

As it relates to spending, yes, consumers have been hit by higher gasoline and food prices, but digging through the sea of data, we find consumers have been up to something else — improving their balance sheets. The Fed’s household debt-service ratio (DSR), a quarterly estimate of the ratio of debt payments to disposable personal income, has fallen to a recent low of 11.51 in the first quarter of 2011 from a peak of 13.95 in the second quarter of 2007. Moreover, since that peak, the DSR has moved steadily down over the past 13 quarters. To put some perspective around the first quarter 2011 DSR figure, it is the lowest level since the second quarter of 1995, when the reading hit 11.47. While the DSR shows that consumers have been getting their houses in order, getting them to spend — after all, we are a consumer-driven economy — will hinge on a better job outlook.

Many will point to the $800 billion cash on the balance sheets of the S&P 500 companies and wonder why they are not hiring. As I mentioned above, jobs are added as companies face a favorable demand equation, but also companies are not likely to hire when staring uncertainty in the proverbial face: Will the Fed undertake another round of stimulus? How fast will the economy grow? Will tax rates move higher as a result of debt-ceiling and deficit-reduction conversations? And so on.

Summer swoon, indeed.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at [email protected] At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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