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What Do You Think Are the Biggest Threats to the U.S. Economic Recovery?

By , Associate Editor, Money Morning •

A handful of factors threaten the strength of the U.S. economic recovery this year, leading many to wonder just how well the country's economy will fare in 2011.

The U.S. Commerce Department last week reported that U.S. gross domestic product (GDP) growth slowed in 2011's first quarter to 1.8%, down from 3.1% at the end of 2010. High gasoline prices and rough winter weather combined to drag down GDP.

The news came a day after U.S. Federal Reserve Chairman Ben Bernanke held the first-ever Fed press conference and said he expects the U.S. economy to grow at a rate of 3.1% to 3.3% this year (down from the 3.4% to 3.9% range previously projected).

"Coming in at 1.8, to get to where Fed's forecast is, you're going to need some robust growth in [quarters] two, three and four," Bob Andres, chief investment strategist and economist at Merion Wealth Partners told Reuters. "In my mind, the Fed's forecast and the Street's forecast are more than likely a little too optimistic going forward."

But reaching that robust growth won't be easy for a country plagued with high unemployment, inflationary pressures, rising oil prices, a weak dollar and a troubled housing market.

Weekly jobless claims reported last Thursday were up 25,000 to 429,000, the third consecutive weekly increase. The four-week moving average of new claims hit 408,500 - the first time it's been over 400,000 since mid-February.

Out-of-work consumers will be spending less, especially as looming inflation threatens to push prices higher.

Bernanke continues to dismiss inflation as a big U.S. economic concern, and the Fed decided last week to keep interest rates between 0.00% and 0.25% "for an extended period." But U.S. consumers have complained that sky-high gasoline prices are eating away at household budgets and some retailers are starting to raise prices. The U.S. economic recovery will suffer if consumer spending is cramped by higher consumer costs.

"Consumers are spending more, but it's getting soaked up in higher gas prices and higher food prices," John Ryding, chief economist at RDQ Economics, told The New York Times. "That's not leaving nearly as much left over for discretionary spending."

The country also continues to struggle with a politically divided Washington trying to agree on a federal budget. Hundreds of billions in spending cuts are needed each year to get government spending to a manageable level, but Congress haggles over what programs to cut and by how much.


Meanwhile, U.S. Treasury Secretary Timothy F. Geithner said that the United States is set to reach its debt limit of $14.29 trillion by May 16. Through "extraordinary measures" the country can still borrow until Aug. 2, but Congress needs to come up with a solution by then.

Threats to the U.S. economy also grew this week when special forces of the U.S. military captured and killed a major source of global terror, al-Qaida leader Osama bin Laden, after a 10-year manhunt.

Money Morning Contributing Editor Martin Hutchinson warned that geopolitical risks from Pakistan coming to light following bin Laden's death threaten the overvalued Dow Jones Industrial Average.

"While we hope this would never be the case, the fact is that some event as yet unforeseen could cause this overvaluation to unwind, and the Dow to correct," said Hutchinson. "What's more, if this event happened to be the 'just-right' kind of geopolitical trigger - hopefully not a direct act of nuclear terrorism - it could be enough to spill the Dow down toward 4,000."

This brings us to next week's Money Morning "Question of the Week": What do you think are the biggest threats to the U.S. economic recovery? Will inflation, unemployment, government spending, terrorism or some other factors derail the economy's improvement? Or are many of these "threats" overblown? Are you preparing for a weak or strong economic recovery?

[Editor's Note: Is there a topic you want to see covered as a "Question of the Week" feature? Then let us know by e-mailing Money Morning at [email protected]. Make sure to reference "Question of the Week suggestion" in the subject line.

We reserve the right to edit responses for length, grammar and clarity.

Thanks to everyone who took the time to participate - via e-mail or by posting their comments directly on the Money Morning Web site.]

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