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Economists paint gloomier picture

Many see weaker growth but feel recovery on track

Economists surveyed by the Associated Press believe the US unemployment rate will be no lower at the end of the year than it is now — 9.5 percent. Economists surveyed by the Associated Press believe the US unemployment rate will be no lower at the end of the year than it is now — 9.5 percent. (Tony Gutierrez/Associated Press)
By Jeannine Aversa
Associated Press / July 29, 2010

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WASHINGTON — The US economic recovery will remain slow deep into next year, held back by shoppers reluctant to spend and employers hesitant to hire, according to an Associated Press survey of leading economists.

The latest quarterly AP Economy Survey shows economists have turned gloomier in the past three months. They foresee weaker growth and higher unemployment than they did before. As a result, the economists think the Federal Reserve will keep interest rates near zero until at least next spring.

Yet despite their expectation of slower growth, a majority of the 42 economists surveyed believe the recovery remains on track, raising hopes that the economy can avoid falling back into a “double-dip’’ recession.

The AP survey compiles forecasts of leading private, corporate, and academic economists on a range of indicators, including employment, consumer spending, and inflation. Among their forecasts:

■ Economic growth the rest of this year and early next year will weaken, to less than 3 percent. From January through May, the economy grew at roughly a 3.5 percent pace.

■ The unemployment rate will be no lower at the end of the year than it is now — 9.5 percent. A majority think it will be 2015 or later before the rate falls to a historically normal 5 percent.

■ State budget shortfalls pose a “significant’’ or “severe’’ risk to the national economy. The loss of tax revenue has forced state and local governments to cut services and lay off workers.

The weak economy leaves Democrats and Republicans on Capitol Hill vulnerable as they head into the November midterm elections. Democrats, who now control both chambers, have the most to lose. The gloomier outlook is also a liability for President Obama.

The economists have turned more pessimistic since the recovery hit turbulence in May. Europe’s debt crisis sent tremors through Wall Street, causing stocks to tumble and raising doubts about the durability of the rebound.

Since then, businesses have been slow to step up hiring. Americans’ confidence in the economy has declined, leading shoppers to reduce spending. And the housing market has weakened further with the end of a home buyer tax credit that had buoyed sales earlier this year.

Consumers aren’t leading this rebound, as they usually do, despite ultralow borrowing costs. Their spending growth will weaken in the second half of this year and strengthen only slightly next year, a majority of economists said. They think shoppers’ reluctance to spend more money poses a “significant’’ or “severe’’ risk to the recovery. “It seems like we hit an air pocket in consumer spending,’’ said survey participant Richard DeKaser, the president of Woodley Park Research.

The tight job market, scant pay raises, and drooping home values are forcing people to spend less and save more. Americans saved 4.2 percent of their disposable income last year. That was the highest level since 1998. Economists expect roughly the same level of saving this year and next.

That’s why growth of less than 3 percent is forecast into 2011. And weak growth helps explain why unemployment is likely to stay high. It takes about 3 percent growth just to create enough jobs to keep pace with the population increase.

Growth would have to equal 5 percent for a full year to drive the unemployment rate down by 1 percentage point. Neither the economists in the AP survey nor the Obama administration expects that to happen.

The Fed’s outlook has turned bleaker, too.

It’s why chairman Ben Bernanke and his colleagues are weighing new steps to invigorate the economy if the recovery shows signs of backsliding. They are also expected to hold interest rates at record lows longer than economists thought three months ago.