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Kathleen Madigan
Aug. 26, 2010, 12:01 a.m. EDT · Recommend (7) · Post:
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Job mismatch stymies economic growth
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Eisner would be a mistake for Tribune
By Kathleen Madigan
NEW YORK (MarketWatch) -- It's getting scary again.
After some improvement in the data over the spring and early summer, the recent news is describing an economy growing below 2%. While technically not a double-dip recession, the recovery could be so weak it will feel like another downturn.
That is because sub-2% growth in real gross domestic product won't reverse any of the drags on the economy -- and it will threaten a main support to recent growth: capital spending.
Investor Peter Schiff invests as if the U.S. economy will collapse, which involves moving money offshore, a move he calls the most patriotic way for an American to invest. Dow Jones Newswires' Meena Thiruvengadam reports on a man who has become a financial fortune teller for Tea Party activists and who predicts an evisceration of the American dream.
In a 2% economy, job seekers won't find much work, workers won't get big pay raises. Financial markets will stay on pins and needles. Policymakers will remain stymied and politicians will rant.
To be sure, those trends sound familiar. The new twist is that Wednesday's data suggest the cloudy outlook is curtailing spending on business equipment. New orders for non-defense capital goods excluding aircraft plunged 8.0% in July, wiping out the gains of the previous two months. Read more about the data.
If new bookings fall again in August, be afraid.
Business spending on equipment has been a growth leader in this recovery, contributing more to GDP growth over the past three quarters than the consumer sector has. Lose business spending and even 2% growth looks unreachable.
Meanwhile, housing's problems have proven to be more intractable than many expected. New home sales followed existing-homes down a deep hole in July. Purchases of new homes plunged 12.4% to a record low annual rate of 276,000.
Economists had expected sales would stay about even with their June tally, which had been lifted by the rush to sign a contract before the end of the homebuyer tax credit.
Expectations didn't pan out and -- worse yet -- it turns out June wasn't such a hot month for home buying, anyway. The Commerce Department revised down June sales to show a gain of just 12.1%, not the 23.6% first reported.
After years of government support, housing can't find a bottom, and its continued slump removes one sector that traditionally has powered growth coming out of a recession.
Wednesday's woeful data caused Macroeconomic Advisers to pare down its estimate for third-quarter growth to an annual rate of 1.7%, from 2.1% the day before.
The recent spate of bad numbers gives ammunition to those worried about a double-dip recession. One negative shock could cause real GDP to contract again. And while the consensus view discounts that scenario, economists are increasingly assigning the probability of a double-dip within their forecasts. Economists at Goldman Sachs, for instance, put chances of a return to negative growth between 25% and 30%.
Forecasters at IHS Global Insight have a probability of 25%. While a one-in-four chance is significant, the forecasters point out double dips are extremely rare and are almost always triggered by an external shock or bad policy move.
"This seems unlikely in the United States in the current environment," they say.
Unlikely, but scarily not totally out of the question.
Kathleen Madigan is the primary author of the Big Picture column. This column originally appeared on Dow Jones Newswires.
It would be a mistake for Tribune Co., wallowing in bankruptcy and desperately in need of help, to turn to former Walt Disney Chief Executive Michael Eisner as its new chairman, writes Jon Friedman.
11:32 a.m. Today11:32 a.m. Aug. 26, 2010 | Comments: 7
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