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Economy May Be Heading for Less Sunny Days

 
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PostPosted: Sun Jun 04, 2006 10:00 am    Post subject: Economy May Be Heading for Less Sunny Days Reply with quote

Economy May Be Heading for Less Sunny Days
Sunday June 4, 12:38 pm ET
By Martin Crutsinger, AP Economics Writer
Economy May Be Heading for Less Sunny Days After Growing at Strong Pace at Beginning of Year

WASHINGTON (AP) -- After years of talking about the Goldilocks economy -- not too hot and not too cold -- all of a sudden it appears the little rascal just got mugged by the three bears. While the economy began the year growing at a strong pace, activity seems to have hit the skids in the spring.

Factory orders fell in April. The five-year housing boom is cooling, with home sales falling and price gains slowing. In the biggest shocker of all, the government reported Friday that businesses created just 75,000 new jobs in May -- 100,000 fewer than expected.

If the onslaught of weaker economic data was not bad enough, there also are signs that long-dormant inflation may be starting to be a problem, and not just in the pain from $3 per gallon gasoline.

The relentless rise in crude oil to above $70 per barrel seems to be starting to trigger price problems outside of energy. The core rate of inflation, excluding food and energy, is now above the 2 percent upper limit favored by Federal Reserve Chairman Ben Bernanke and his colleagues.

Slowing economic growth and rising inflation raise the specter of stagflation. This dreaded combination of economic stagnation and inflation had the country in its grips for more than a decade through the 1970s and early 1980s, bringing grief to the presidencies of Richard Nixon, Gerald Ford and Jimmy Carter.

In perhaps the most ominous worry of all, some economists see parallels between May 2006 and May 2000.

Six years ago, an unexpectedly weak payroll number was dismissed as a fluke. Yet in hindsight, it was the start of a slide that culminated in a recession the next year that ended the longest economic expansion in U.S. history.

While economists hope this year's slowdown will have a more benign ending, they are busily marking down their economic forecasts based on the recent weaker-than-expected numbers.

The overall economy grew at an annual rate of 5.3 percent in the January-March quarter. Economists foresee a rate of about 2.5 percent in the current April-June quarter, down a full percentage point from estimates for these three months.

"We are starting to see evidence that the economy is slowing pretty abruptly," said David Wyss, chief economist at Standard & Poor's in New York. "The question is will there be enough strength in other areas to offset the slowdown in consumer spending and housing."

All of this comes at an inopportune time for President Bush, who last week nominated Goldman Sachs chief executive Henry Paulson Jr. to replace John Snow as treasury secretary.

The White House hopes the selection of a Wall Street superstar can help lift Republicans' sagging poll numbers before the November elections, a goal that a weakening economy could thwart.

Higher gasoline prices and weaker job growth already have affected consumer confidence, which fell in May by the steepest amount since last fall's hurricanes.

The worry is that overall consumer spending, which accounts for two-thirds of total economic activity, will slow. U.S. automakers already are feeling the pinch, reporting big declines in May auto sales.

Many retail chains did post good sales in May. But the largest retailer, Wal-Mart, had results that failed to meet expectations, reflecting the squeeze its lower-income customers are feeling from gas prices.

Still, analysts say they do not see the situation in such dire terms that it means the country is headed for a recession.

In some ways, the slower growth is just what the Fed has sought with its string of 16 interest rate increases over the past two years. The higher borrowing costs were designed to slow economic activity enough to keep inflation under control.

With signs of the slowdown increasing, the Fed is likely to call a halt to further rate increases, especially if the recent jump in inflation proves temporary.

Many economists also dismiss worries the current slowdown could signal that Fed has overdone the credit tightening, raising prospects of a rougher outcome rather than the soft-landing aimed for.

"When the economy slows, it is not surprising that at points we feel like we are slowing too much," said Mark Zandi, chief economist at Moody's Economy.com. "It is very tricky to get the economy to throttle back in a smooth, clock-like way. The current situation is not unusual."

EDITOR'S NOTE -- Martin Crutsinger has covered economic issues in Washington for The Associated Press since 1984.
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