Recession risks up amid slow growth, debt standoff

[July 30, 2011]  WASHINGTON (AP) -- The economy is at risk of slipping into another recession.

It nearly stalled in the first six months of the year, the government reported Friday. Economic growth was feeble in the second quarter and practically nonexistent in the first.

The new picture of an economy far weaker than most analysts had expected suddenly made a second recession a more serious threat -- and the threat will rise if Congress can't reach a deal to raise the government's debt limit.

"The only question now is, how much weaker could things get?" says Nariman Behravesh, chief economist at IHS Global Insight.

In April, May and June, the economy grew at a 1.3 percent annual rate, below expectations. And the government changed its growth figure for January, February and March to 0.4 percent, far below the previous estimate of 1.9 percent.

Combined, the first half of the year amounts to the worst six-month performance since the Great Recession officially ended in June 2009.

Over the past year, the gross domestic product -- the total output of goods and services in the United States, and the broadest measure of the economy's health -- recorded actual growth of 1.6 percent.

Since 1950, year-to-year growth has dipped below 2 percent 12 times. Ten of those times, the economy was already in recession or soon fell into one, says Mark Vitner, senior economist at Wells Fargo Securities.

Normal economic growth is closer to 3 percent.

High gasoline prices leave people with less money to spend on other goods and services. And not all spending on gas contributes to the U.S. economy because some of the money goes to oil-producing countries. GDP figures are also inflation-adjusted, so spending $1 more for a gallon doesn't mean $1 of additional help to the economy.

Manufacturing disruptions from the Japan earthquake, cuts in state and local government and tighter household budgets have weighed down the economy, too.

Add to those problems the uncertainty fanned by the political stalemate in Washington, with Republicans refusing to raise the federal government's $14.3 trillion borrowing limit unless Democrats agree to deep federal spending cuts on the GOP's terms.

Without an agreement, the Treasury Department says, the government won't have enough money to pay all its bills after Tuesday. It will have to cut spending by about 40 percent and choose which programs and beneficiaries receive money and which don't.

The dismal second-quarter report led economists to reduce their estimates for growth in the second half of the year. Capital Economics, which had expected the economy to grow 2.5 percent this year, now says 2 percent looks more likely.

Joel Naroff of Naroff Economic Advisors says he's waiting until the debt-limit deadline passes to revise his economic forecasts for the rest of 2011. He knows he'll scale back his estimates. He just doesn't know how much.

If a deal isn't reached for another month, Naroff estimates there's an 80 to 90 percent chance that the spending cuts would tip the economy into recession. Even if there is a deal, it would likely trigger significant spending cuts that would slow growth, at least in the short run.

"You kick the federal government, and the economy is going to be doubled over in pain," Naroff says.

Federal Reserve Chairman Ben Bernanke and other economists have warned Congress against cutting too much too soon because the economy remains so fragile.

The economy needs to expand so it can create jobs for a growing population. It must grow at a 2.5 percent annual rate to keep the unemployment rate from rising and at a 5 percent rate to bring unemployment down significantly.

In a Twitter message, economist Justin Wolfers of the University of Pennsylvania's Wharton School said he thinks there's a 40 percent chance the economy has already been in a recession for the past four months.

Normally, when the economy is this weak, the government spends more and the Federal Reserve aggressively tries to stimulate growth. But President Barack Obama's $862 billion stimulus package of spending programs and tax cuts ran out last year -- and won't be revived by a Congress focused on cutting government debt.

And the Federal Reserve last month ended a $600 billion bond-buying program designed to jolt the economy by lowering long-term interest rates and lifting stock prices.

The Fed is keeping short-term interest rates near zero, and Bernanke this month said the Fed is prepared to do more if the economy remains weak. But the central bank has been more worried recently about a resurgence of inflation.

The private sector hasn't picked up the slack. The housing industry, which usually drives economic recoveries, is still depressed after home prices started tumbling in 2006 and 2007.

Americans are still carrying heavy debts, and what little gains they've made in wages have been eaten up by higher gas and food prices. Businesses, getting more work out of staffs downsized during the recession, are reluctant to hire until they're sure their sales will pick up.

"What business is going to hire into the unknown?" Naroff says.

[Associated Press; By PAUL WISEMAN and CHRISTOPHER S. RUGABER]

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