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Some Dreary Forecasts From Recovery Skeptics

Call them permabears. A solid six months of good and getting-better data — fewer Americans claiming unemployment benefits, rising industrial production and improving economic sentiment among them — have failed to convince them of the strength of the recovery.

Some offer outright dire predictions. There is the Economic Cycle Research Institute, a New York-based forecasting firm, which foresees a new recession. There is A. Gary Shilling & Company, a consulting firm in Springfield, N.J., which argues that the economy will weaken through the rest of the year.
[Watch ECRI call recession's end in April 2009]

There is also the asset manager John P. Hussman. Last month, he wrote in a research note that “while investors and the economic consensus has largely abandoned any concern about a fresh economic downturn, we remain uncomfortable,” given the deterioration of certain leading measures, like consumption growth.

Others — call them the baby bears, perhaps — simply offer what they say are more realistic assessments of both the weakness of the economy and the tepid pace of the recovery, despite a few months in which a spate of reports surprised to the upside.

“The recovery is anemic, subpar, below trend, below potential,” said Nouriel Roubini, the New York economist whose consistently dour predictions (including calling the collapse of the housing bubble) have won him the nickname “Dr. Doom,” and who might fall into that latter camp.

“If we avoid a major external or internal shock,” like a military confrontation with Iran or a major default in the euro zone, “we may avoid another recession and that might be good news. But that’s where the good news ends,” said Professor Roubini, who teaches at New York University and heads Roubini Global Economics, an economic consultancy.

Most firms have been raising their estimates for economic growth on the back of months of good news. For instance, Macroeconomic Advisers, the respected forecasting firm, has bumped its estimate of current economic growth to an annualized 2.2 percent, up from 1.8 percent. And the Federal Reserve currently estimates that the economy will grow a respectable if not spectacular 2.2 percent to 2.7 percent this year.

“I’m relatively optimistic,” said Mark Zandi, the chief economist at Moody’s Analytics, who released a note this week showing unemployment dropping faster than he previously forecast. As for the more dire claims about an economy on the brink, “I don’t really take those seriously,” he said.

But the bears point out that 2 percent-plus growth is sluggish growth by historical standards. During the expansion of the 2000s, for instance, annual growth rates routinely spiked above 3.5 percent, even hitting 6 percent in one quarter.

And no less of a market authority than Ben S. Bernanke, the chairman of the Federal Reserve, warns that the recent strength might not be sustained. “The recent news has been good,” he said in an interview with ABC News last month. “But I think we need to be cautious and make sure this is sustainable. And we haven’t quite yet got to the point where we can be completely confident that we’re on a track to full recovery.”

So what are the bears worried about? And what explains the last few months, in which the unemployment rate fell to 8.2 percent in March from 8.9 percent in October?

The bears point to weakness underlying current numbers. Disposable personal income, a measure of how much money Americans have left over once they have paid their taxes, has barely been increasing of late, raising questions about how much spending the debt-soaked American consumer can contribute to the recovery. The shock of growth at the end of 2011, which gave a shot in the arm to economic confidence this spring, came mostly from wholesalers restocking their inventories as well.

“Final sales are barely growing,” Professor Roubini said. “So I don’t see a sustainable recovery coming from that.”

On top of that, the bears note that some trends could be making the job gains and economic growth of the last few months seem more robust than they really are. One factor is the warm winter, which might have pulled forward economic activity from the spring. In a research note entitled “Sticking With Sluggish,” the relatively pessimistic analysts at Goldman Sachs argued that the “exceptionally mild” winter stole commerce and hiring from March and April.

Moreover, the surge of hiring in the winter, which was unexplained by growth in economic output, could have been from employers who had laid off too many workers during the recession and were swinging the other way by adding too many workers, meaning hiring might slow down again.

Those trends were perhaps borne out in the lower-than-expected jobs number released on Friday, which showed that private employers added 121,000 workers in March, just 2,420 jobs per state and about half the amount added in the previous three months.

Then, there are the headwinds coming from Europe, where debt yields are rising yet again for countries including Spain. The economy is cooling in China, now a major United States export market. Worse, gas prices have continued to track upward over increased demand from emerging economies as well as from concerns about a confrontation with Iran as the White House and the European Union prepare to apply strict new sanctions.

It all adds up to a bleak picture, at least in the bears’ minority opinion.


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