A handful of factors threaten the strength of the U.S. economic recovery this year, like U.S. government spending and high unemployment, leading many to wonder just how well the country's economy will fare in 2011.
The U.S. Commerce Department reported last month 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% 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 pressure, rising oil prices, a weak dollar and a troubled housing market, which weigh heavily on the U.S. economic recovery.
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 now 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 Congress that is struggling agree on a federal budget. Hundreds of billions in spending cuts are needed each year to get U.S. government spending to a manageable level, but Congress is gridlocked over how much to cut and where to cut it from.
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 last 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 prompted last 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?
The following collection of comments paints a grim picture of readers' U.S. economic outlook, and outlines the biggest threats they see to the economic recovery – with U.S. government spending ranking as a huge concern.
Struggle for Recovery – If Any Recovery at All
You conclude your question this week by asking if we are looking for a weak or a strong recovery. I don't expect to see any real recovery, or at least not until we have purged the bad debts from the system. Most of the "assets" that banks hold are debts that they are owed by others, and the plain truth is that an awful lot of those debts are not ever going to be paid back. Given the leverage that the banks are using, if only a small fraction of those debts go bad, despite all the "mark to model" and "extend and pretend" fantasies, then the banks are going to find themselves in a clearly bankrupt condition. And when one goes under, others will follow in rapid order.
It is not clear what will be the trigger for this cascade of collapse. It may be a default by Greece or some other European country. It may be another surge in defaults and foreclosures as housing prices tumble again. It may be a loss of confidence in the bond market, marked by a sharp rise in interest rates on U.S. debt. Regardless, something is going to rip the shroud of confidence that currently obscures the severity of the bad debt problems, and when that happens, it will quickly spread. I don't think that another bailout like 2008 is possible, and it might not even work if they tried it.
Wasted capital is gone, and must be written off before a true recovery can begin. The way debt in the monetary system has metastasized, this probably means that most of our banks, at least the too-big-to-fail ones that are up to their eyeballs in all the funny stuff, are going to be liquidated, with all the pain that involves, but writing off debt is always painful. This may even include the Fed, which is levered at around 50:1, and is holding $1.4 trillion of toxic assets (nearly half its total balance sheet) at an assumed value of 100 cents on the dollar. A lot of promises that have been made are going to be broken, and this means promises made by the U.S. government as well.
— Gordon F.
The biggest threats are Obamacare, Bernanke, and China.
— Paul N.
Based on the things that Bernanke had said at the Federal Reserve press conference, I feel that if these actions taken by the Federal Reserve are any indication of the federal government's inability to take on the real problems facing this country, I believe that our country is, indeed, in worse shape than previously addressed by anyone.
Further easing of the monetary system will cause further instability in the world economy and ultimately come back to haunt us. We are already facing an inflation problem here in our country. If we continue this policy of hot money, inflation will turn into hyperinflation and businesses will shut down and people will be unemployed and what do you have? A repeat of the Great Depression!
Our own government will be our downfall.
— Randy R.
My feeling is that the economy will continue to limp on until this fall. Schools will be out soon and dump thousands on the job market. Expect unemployment to go up, wages down. The price of gas has sucked all the available spending money out of people's pockets. People are using credit cards to buy groceries! Another million homes in foreclosure has people selling their 'toys' at bargain basement prices. Check out the prices on used Harley Davidsons.
Food prices are going up as cost of production is increasing, but the big dark cloud is climate change. We saw record tornado damage last week and more predicted next-when this hits the Internet. But the drought in Texas, New Mexico, Louisiana, Oklahoma and Kansas is going to hit even harder this fall.
— Doris K.
The fact that the U.S. government is buying financial stocks in the major banks on the pretext of a bailout plan, virtually all the banks will be government-owned. This could in a way impair the financial sector of the economy as far as competition and investment is concerned.
— Nathan I.
Reelection of Obama would put the USA into a deeper depression.
Economic threats? Greed and corruption; denial and complacency.
— Patricia A.
Be sure to answer next week's question: Do you agree with the bullish long-term commodities outlook? Did last week's slide prompt you to get out of the commodities markets, or do you see this price drop as a buying opportunity? What are your concerns, if any, over commodities maintaining their gains?
Send your answers to firstname.lastname@example.org.!
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Thanks to everyone who took the time to participate – via e-mail or by posting their comments directly on the Money Morning Web site.]
News and Related Story Links:
- Money Morning:
The Death of bin Laden: What it Means for Pakistan, the Dow and Your Financial Security
- Money Morning:
A Slowing U.S. Economic Recovery Faces Strong Headwinds in 2011
- Money Morning:
Gas Prices, Bad Weather Slam U.S. Economy; GDP Growth Slowed to 1.8%
- Money Morning:
Did Ben Bernanke Hint at QE3 During Historic Fed Press Conference?
Economic growth slows, inflation surges
- The New York Times:
U.S. Economic Growth Slows to 1.8% Rate in Quarter
- Money Morning News Archive:
Question of the Week Feature