Economists Downgrade U.S. Recovery Outlook, Survey Indicates

(Bloomberg) -- Economists downgraded their projections for a recovery from the deepest U.S. recession in half a century, now seeing the jobless rate exceeding 8 percent through 2011, a Bloomberg News survey showed.

Unemployment will average 8.5 percent in 2011 after a 9.6 percent rate next year, higher than previously expected, according to the median forecast in the survey taken from May 4 to May 11. The economy may expand 2.8 percent in 2011, less than estimated last month, after a 1.9 percent rise in 2010.

“The worse the labor market is and the longer that lasts, the more difficult it’ll be for consumers to recover,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. “The economy isn’t going to come roaring out of the box here.”

A weaker recovery will keep pressure on the Obama administration, lawmakers and Federal Reserve officials to maintain the emergency lending and stimulus programs implemented in the past year. Shapiro said the danger is that policy makers may “pull out too soon.”

The economy will contract at a 1.9 percent pace this quarter, returning to a growth rate of 0.5 percent in the July to September period and 1.8 percent in the final three months, according to the median forecast of 61 economists surveyed.

Consumer spending, after stagnating this quarter, will not exceed the first three months’ 2.2 percent gain in the second half of the year, the survey showed. Such spending accounts for 70 percent of the economy.

25-Year High

The unemployment rate jumped to 8.9 percent in April, the highest level in 25 years, and the economy has lost 5.7 million jobs since the recession began in December 2007, the most of any economic slump since the Great Depression, according to Labor Department figures.

Some companies have yet to see any signs of recovery. Airgas Inc., the biggest U.S. distributor of industrial gases, last week forecast per-share earnings may fall this year and said April sales failed to pick up as expected.

“We are expecting no improvement in the economy during the calendar year,” Chief Executive Officer Peter McCausland said on a May 6 conference call with analysts. “We’ve never seen a downturn like this. When we see a tick up, then we’ll say things have stabilized.”

More Capital

The credit crunch, while easing, is clouding prospects for a recovery. Ten of the 19 largest U.S. banks will need another $75 billion in capital to withstand deterioration in the economy almost as dire as economists now anticipate, according to results of government tests issued last week. Examiners used an “adverse scenario” of a 3.3 percent decline in gross domestic product this year, and an average unemployment rate of 10.3 percent in 2010.

“The financial crisis is still making people wonder how far and how fast this economy can come back,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Credit is the life blood of the economy and bank balance sheets are still very constrained. That will put a damper on the strength of this recovery.”

A benchmark interest rate that’s already near zero and a yawning government budget gap make it unlikely the government will step in with additional spending, Rupkey said. “We may need more stimulus, but we can’t afford more at this stage,” he said.

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