Significant Downside Risks Remain for Economic Recovery

by: Research Recap

The US economy is recovering much more slowly than expected after a severe recession and still faces downside risks, says Oxford Economics,

Excerpts from USA: Country Economic Forecast: 19 Jul 2010 (Premium)

The recent spate of relatively weak indicators, including very low consumer confidence, subdued private sector job growth and the continuing fragility of the housing sector, has raised concerns about a double-dip recession.

However, while such an outcome cannot be dismissed it is not being signaled by indicators such as new orders, which remain strong, or readings on the ISM indexes that are consistent with moderate growth. And a healthy corporate sector, loose monetary policy and low long-term interest rates are also supportive factors.

Overall, in the light of recent data and signs of moderating growth overseas, we have pared back our growth forecasts to 3.1% for 2010 and 3.3% for 2011, down from 3.4% and 3.8% a month ago.

An important risk to the forecast remains the outcome in Europe, both in terms of the extent of the slowdown there and risks to the banking sector.

There are significant risks to this forecast. The European situation is one. If it should evolve into a full-blown banking and financial crisis, the resulting credit freeze is likely to engulf the entire world, including the US.

On the domestic side, volatility in the financial sector and weak employment gains could weigh more heavily than we expect on consumers, causing an outright retrenchment rather than merely conservative spending growth.

Another wild card is tax policy – if Congress fails to act before the end of 2010, tax rates in 2011 will revert to levels that prevailed before the Bush tax cuts.