Risks of 2nd recession rise amid slow growth

Threat will increase if Congress fails to reach debt deal

Associated Press

WASHINGTON

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 already was 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 also are 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 percent to 90 percent chance that the spending cuts would tip the economy into recession. Even if there is a deal, it likely would trigger significant spending cuts that would slow growth, at least in the short run.