Economists Expect 2008's Second Half To Be Worse Than First - WSJ

consumer spending slowdown and weakening glonal economy, the two shore up 2nd quarter GDP, will impact US economy in a negative manner in the second half of 2008. the sliver lining might be lower commodity prices.... The U.S. economy, facing a consumer-spending slowdown and a weakening global economy, is poised for an unpleasant finish to 2008. WSJ's Adam Najberg talks with reporter Kelly Evans about her outlook on the U.S. economy. The pattern of growth that is emerging this year -- a mediocre first half followed by a weaker second half -- is the reverse of what most forecasts showed at the beginning of the year. "We now believe the economic weakness in the U.S. will likely worsen," Kenneth Chenault, chief executive of American Express Co., said last month when it posted second-quarter earnings short of analyst estimates. Economists have downgraded growth forecasts in recent weeks. "We are on the cusp of a renewed deceleration in growth," Goldman Sachs economists said, noting that a contraction in consumer spending is likely over the second half of this year and that "the risk that foreign-demand weakness will wash back onto U.S. shores is clearly growing." Households are grappling with layoffs, stagnant wages, falling home values and tighter credit. The U.S. government's economic-stimulus program, which was intended to give households a boost in the middle of the year, may not have done enough to stave off recession. The payments coincided with a run-up in fuel prices, so a portion of the checks were gobbled up at the gas pump. So far, most of the money appears to have gone to savings and debt rather than to immediate spending in stores. "The air is coming out of the balloon pretty quickly here," said Brian Bethune, a senior economist with Global Insight, a Lexington, Mass., forecasting firm. "Consumers are just throwing in the towel." Retail sales in July were weaker than expected at many chain stores, suggesting the May and June sales boost from the stimulus checks is quickly fading. Talbots Inc., Kohl's Corp. and Gap Inc. were among those retailers reporting double-digit sales declines last month. Discounters, including Wal-Mart Stores Inc. and Costco Wholesale Corp., fared better, but Wal-Mart U.S. President Eduardo Castro-Wright warned that spending could slow: "With the end of the stimulus checks, we know consumers are spending more cautiously," he said. Consumer spending is poised to weaken just as foreign growth -- a vital offset to sluggish domestic demand -- also shows signs of slowing. Surging export growth, coupled with falling demand for imports, added 2.4 percentage points to second-quarter growth in U.S. gross domestic product -- marking the largest contribution in nearly three decades. Without that contribution, GDP would have slipped 0.5%. Last month the "beige book" survey of regional economic conditions compiled by the regional Federal Reserve banks found that producers worried about weakening overseas demand. In the Chicago area, export-oriented firms "noted a recent slowing in the pace of growth, particularly in demand from Europe." Boston-area manufacturers indicated that "foreign demand growth may be slowing," while in Dallas some manufacturers specifically cited "weak demand in Western Europe." And Norbert Ore, an executive at Georgia-Pacific Corp. who oversees the Institute for Supply Management's monthly survey of U.S. manufacturing activity, called declining exports "the biggest risk we face as an industry." European Central Bank President Jean-Claude Trichet, in holding euro-zone interest rates steady at 4.25% last week, said that while he remains focused on inflation, data point to weaker growth. Japan, meanwhile, may already be in recession. Second-quarter GDP data, set to be released Tuesday, are expected to show the world's second-largest economy contracted. J.P. Morgan's index of global manufacturing activity contracted in July for the second straight month, turning in its worst performance in five years as new orders fell to their lowest level since late 2001. Production in Japan and the U.K. contracted at the sharpest rate since the 1998 Asian financial crisis, while euro-zone production had its fastest fall since early 2002. Spreading weakness means that the U.S., the euro zone, and Japan, which together make up nearly two-thirds of global GDP, are flirting with recession. Fast-growing economies like China, India and Brazil could follow. Weak exports could lead to further deterioration in the U.S. labor market as companies lose business, according to Joseph Lupton, a senior economist at J.P. Morgan. "The bottom line is it's going to be a weak second half." Federal Reserve policy makers appear concerned about the second half. In a statement following the Tuesday decision to hold its interest-rate target at 2%, the Fed policy-setting committee omitted a reference from its prior statement suggesting that the risks of weaker growth had diminished. The Fed reiterated its view that "tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters." Still, there may be a silver lining: Slowing global demand is helping to bring down the cost of oil and other commodities. Falling prices could offer relief to consumers and ease some companies' cost pressures. That could also ease inflation concerns at the Fed, giving it more leeway to bolster the economy through lower interest rates.