US economy: revised GDP numbers raise specter of a relapse

New GDP figures released Tuesday suggest that the US economy is growing more slowly than initially thought. Obama warns that loss of confidence could lead to a 'double-dip' recession.

The US economy grew at a 2.8 percent annual pace in this year's third quarter, slower than initially estimated, the Commerce Department reported Tuesday. This adds to concerns about the pace of recovery, with some forecasters warning that the economy could relapse into recession next year.

President Obama raised this "double-dip" scenario in comments on the economy last week. He talked of the need for federal efforts to spur job creation, but added that "if we keep on adding to the debt … people could lose confidence in the US economy in a way that could actually lead to a double-dip recession."

Most forecasters predict that the economic recovery will continue next year, but at too tepid a pace to generate significant job gains. And they say that a double-dip is possible, though not necessarily for the reason Mr. Obama cited.

Economist Mark Zandi sees a 25 percent chance of recession next year, and says the risk is significant enough that policymakers should take precautions with additional stimulus efforts.

"It's important to avoid that scenario," says Mr. Zandi, chief economist at Moody's Economy.com in West Chester, Pa. "It would be very difficult to get out."

Call for additional economic stimulus

Speaking in a recent conference call with reporters, he cited two reasons:

First, relapse into recession raises the prospect that incomes, home prices, and stock prices could go on a downward spiral that destroys jobs and is hard to stop. Second, the government has already spent a massive amount fighting recession in the past two years -- including efforts to prevent that kind of deflationary spiral. As Zandi sees it, the government can afford to spend a bit more on stimulus now -- but has depleted the resources it would need to battle another big recession.

Worries about the economy have restrained a stock-market rally in recent months. Stock investors are expecting the recession to end, but aren't sure if the recovery will be strong enough to sustain strong growth in consumer spending and jobs.

That's the view held also by most economists -- including Zandi. In one new survey, forecasters have actually become a bit more optimistic in the past month.

Gross domestic product GDP will grow 3.2 percent next year pace, according to a survey of members of the National Association for Business Economics, released Monday. But the survey participants varied widely in their views.

The five most pessimistic forecasters predict the economy will keep shedding jobs throughout next year -- losing 1.8 million by year-end.

Stubborn unemployment

The five most optimistic see job gains totaling 3.6 million for the year. The consensus view is that the economy will create 1.4 million new jobs, but that unemployment will remain at 9.6 percent of the labor force at year’s end, not far below today’s level.

The risk of a double-dip stems from the fragile character of the current economy, with consumers and banks still working their way out of a housing bust.

Offsetting this is the massive government stimulus crafted by Congress and the Obama administration this spring -- $787 billion in all. The stimulus impact on GDP is now basically at its peak, however.

Tuesday's third-quarter GDP report showed slower growth than the 3.5 percent pace initially estimated a month ago. The reasons include weaker growth in consumer spending than initially estimated, a bigger decline in commercial building, and a poorer trade balance due to an upward revision in imports.

Other economic reports Tuesday sent mixed signals. Consumer confidence rose in November, the Conference Board reported. But despite their improving view of the future, Americans said jobs are getting harder to find.

Meanwhile, the Standard & Poor's Case-Shiller index of home prices edged up in September. But a separate report, from First American CoreLogic, estimated that 23 percent of home mortgages in the US are "under water," with a loan balance greater than the value of the home. That, coupled with high unemployment, could mean that default and foreclosures cause a renewed slide in home prices in 2010.

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