Economists cut US growth forecasts, but remain optimistic economy will recover from grim 1Q

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WASHINGTON—U.S. business economists have sharply cut their growth forecasts for the April-June quarter and 2014, though they remain optimistic that the economy will rebound from a dismal first quarter.

A survey by the National Association of Business Economics, released Friday, found that economists expect, on average, growth of 3 per cent at an annual rate in the second quarter. That’s down from 3.5 per cent in a June survey. Growth in 2014 as a whole will be just 1.6 per cent, they project, sharply below a previous forecast of 2.5 per cent.

The lower 2014 forecast largely reflects the impact of a sharp contraction in the first quarter. The economy shrank 2.9 per cent at an annual rate, the biggest drop in five years. That decline will weigh heavily on the economy this year, even if growth resumes and stays at 3 per cent or above, as most economists expect.

The economists reduced their second-quarter forecast largely because they expect consumers spent at a much more modest pace. They now expect spending will grow just 2.3 per cent at an annual rate in the second quarter, down from a 2.9 per cent estimate in June. Spending rose just 1 per cent in the first quarter, the smallest increase in four years, a sign consumers are still reluctant to spend freely,

The NABE did a special survey after the government announced the dismal figures at the end of June. The group typically surveys economists quarterly.

Despite the downgrades, the survey underscores that economists are mostly optimistic about the rest of this year. Analysts largely blame the first quarter shrinkage on temporary factors, such as harsh winter weather and a sharp slowdown in inventory restocking. When companies restock their inventories at a weaker pace, it slows demand for factory goods and lowers production.

Jack Kleinhenz, president of the association and chief economist at the National Retail Federation, said that most other recent economic data, particularly regarding hiring, has been positive. Employers have added an average of 230,000 jobs a month this year, one of the best stretches since the recession.

In addition, consumers are more confident and government spending cuts and tax increases are exerting less of a drag. In 2013, a Social Security tax cut expired and government spending cuts were implemented. The combined effects slowed growth by 1.5 percentage points, some economists estimate.

“Many of the fundamentals are there for growth,” Kleinhenz said.

As a result, the 50 economists who responded to the survey see the chances of a recession this year or next as pretty low. Sixty per cent said the odds were 10 per cent or lower, and more than 90 per cent said they were 25 per cent or lower.