–Cuts US Growth Outlook For Next 3 Yrs; Just +1.7%

By Brai Odion-Esene

WASHINGTON (MNI) – Standard & Poor’s Wednesday slashed its
projections for the U.S. economic activity over the next three years,
citing continued concerns over the pace of the recovery and an
increasingly unfavorable outlook for growth.

In comments made in a research note, analysts at the ratings agency
also predicted the Federal Reserve will likely introduce another program
of quantitative easing similar to that concluded at the end of June,
although its economic impact will likely be modest.

S&P noted while the recent panic that afflicted financial markets
has subsided, recovery concerns remain very real. “After the recession
officially ended two years ago, the outlook for growth is worsening and
the U.S. economy is still treading water trying to stay afloat,” it
said.

And although economic data for July showed a slight improvement in
the U.S. economy, S&P said it is not enough to support expectations of
a bounce in second half growth. “We now expect to see an even slower
recovery than the half-speed we earlier expected,” it said.

The report projects 1.9% growth in the third quarter and 1.8% in
the fourth, lowering growth for 2011 overall to 1.7% instead of 2.4% the
firm previously expected. S&P also revised down its growth expectations
for 2012 and 2013 (+2.0% and +2.1%, respectively), “as a more drawn-out
recovery is factored into our forecast.”

S&P stressed that it expects weak growth, not a recession, but the
data indicates “a more drawn-out, painful recovery,” as opposed to one
that merely progresses at half-speed.

It added that with the economy in such a fragile state, the shock
of another stock market drop and resulting loss of wealth could be the
tipping point.

Commenting on how it believes the Fed will react to stalled U.S.
economic growth, S&P said the fact that three members of the Federal
Open Market Committee dissented last week against the decision to assign
a time frame to its “extended period” phrase, could lead to an
interesting struggle between the doves and hawks on the committee for
the remainder of 2011.

S&P does not expect a rate hike from the Fed before 2014, but added
that since the Fed has already played its best hand, it will likely
attempt another program of quantitative easing similar to the last one,
possibly later this year.

“Both measures should boost financial conditions, though they will
only modestly support the economic growth,” the S&P report said. “They
will, however, prevent the risk of slipping into outright deflation.
Given that the Fed has fewer effective ways to stop deflation but has
numerous ways to tighten policy, the Fed will likely project the outlook
to remain weak and fight deflation.”

S&P said the lack of weapons or the political resolve to fight the
economic crisis is a large reason it believes the economy is more
vulnerable to another recession. “This time, the Fed is confronting the
collapse with a sling shot, not a bazooka, so its measures will have
less bite,” it said.

The report warned that another shock to the economy, even a mild
one, could push the recovery back into recession. “Another plunge in the
stock market, a deeper contraction in already weak consumer confidence
levels, one more spike in initial claims that holds, or sub-50 ISM
readings for several months would push the recession gauge to the
brink,” S&P said.

The report sees the U.S. labor market remaining weak into 2013,
which in turn will continue to weigh down the housing market, keeping it
soft. “Without that jobs-related boost, housing won’t contribute to the
recovery,” it said.

But the chances of a double-dip recession have been reduced,
according to S&P, in light of last week’s July retail sales data that
showed consumers began to loosen their purse strings.

Total sales jumped an upbeat 0.5% over June, and most importantly,
were up 0.3% (after coming in +0.4% in June) excluding autos, gas, and
building materials, S&P noted. Combined with a July jobs report that
showed a better-than-expected 117,000 rise in nonfarm payrolls and the
unemployment rate down to 9.1%, S&P said although the results do not
suggest the U.S. economy is out of the woods, “at least the economy is
inching away from a double-dip recession.”

** Market News International Washington Bureau: 202-371-2121 **

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