Fragile economic recovery shows growing cracks

 

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After a big spring, Zach Atya thought the Solstice Sunglass Boutique would have a boffo summer.

Instead, July sales at the McLean, Va. store are 7% short of its target, even with promotions.

"People are shopping around and comparing prices,'' said Atya, the store's assistant manager. They're "uncomfortable with spending money now.''

When the job market began to crack in April, most economists said they weren't worried about the recovery. They're worried now.

As the recovery slows, optimism is giving way to caution, with undercurrents of something darker. Economic forecasts are coming down all over Wall Street: Goldman Sachs and Deutsche Bank both cut forecasts of second-quarter growth to just over 1%. Companies from chipmaker Intel to Morgan Stanley have missed or lowered earnings forecasts — 99 companies in the Standard & Poor's 500 lowered second-quarter projections. In June, 22 of 30 U.S. economic-data reports also missed forecasts, Merrill said.

"We're worried about growth slowing down everywhere, and about it being self-reinforcing,'' said Peter Fisher, global head of fixed income for Black Rock, the world's largest asset manager. "I'm less worried about whether growth is slowing, and more worried about how much farther we have to go.''

It could get much worse. A combination of expiring tax cuts and slashed federal spending set for Dec. 31 could shave 4% or more off U.S. gross domestic product next year, throwing millions of people out of work if Congress doesn't stop them. Many economists think even a compromise that extends some tax cuts and reduces or delays spending cuts could reduce growth.

Three years into its recovery, the economy is once again on rough road. Gross domestic product — the leading barometer of the nation's economic health because it measures the value of all goods and services made in the U.S. — equals consumer spending plus business investment plus government outlays, less the trade deficit. And all four are in trouble.

Since 1990, unemployment has generally fallen when growth is 2.5% or better. As growth has stalled this year, so has the improvement in unemployment, now stuck at 8.2%. And as Federal Reserve Chairman Ben Bernanke told Congress last week, reining in the budget deficit too fast at year-end could cost 1.25 million jobs.

"It's about fear and uncertainty,'' said Mike Collins, a bond-portfolio manager at Prudential Fixed Income. "When corporations have uncertainty, they cut back hiring and they cut capital spending. It feels like that's what's happening.''

Consumption

What's hurting consumption? A shortage of good-paying jobs for one. Just ask Janet Beaman.

The 61-year old from Manassas, Va. was a mortgage underwriter until losing that job in 2007 as the housing market began to fracture. She became a security guard for half the pay. Then her tight budget took another hit when her hours got cut several months ago.

Nights out have been traded in for movies at home, and her 13-year old Jeep Cherokee is being asked to keep rolling. She went back to college to upgrade her skills, and $800 a month in student-loan payments begin next month.

"The big night is if we go through the drive-through,'' at a fast-food joint, Beaman said. "I pray every day, 'let me drive this car a little longer.' ''