It's official: Most economists have been way too optimistic about pace of the economic recovery. Will the latest jobs numbers spur the Fed to act again?
FORTUNE — Virtually everyone has been wishfully thinking that what’s been slowing down the U.S. economy was only temporary. But the spate of crushingly disappointing economic data has all but confirmed that most economists have been way too optimistic, and that the problems ailing markets are not going to disappear anytime soon.
Start with today’s unnerving unemployment figures, which will no doubt lead to calls for the Fed to step in and play doctor again. After several months of strong hiring, job growth slowed sharply in May, adding only 54,000 nonfarm payroll jobs. This compares with an increase of 232,000 jobs in April. The unemployment rate ticked up 9.1% from 9.0% in April. The figures were dramatically lower than expected — economists had been predicting a rise of 160,00 payrolls and a slight drop in the unemployment rate, to 8.9%.
Markets were bracing for it. Stocks plunged Wednesday, dragging the Standard and Poor’s 500 Index to its worst loss since August as slower growth in jobs and manufacturing fueled worries that the economy is faltering. They fell sharply again following the jobs data.
This is all happening as analysts at most of the major banks are lowering their forecasts for GDP growth for the second quarter: JPMorgan Chase JPM economists revised their estimate to a 2.5% rate from 3%, while Bank of America Merrill Lynch BAC cut its to 2% from 2.8%. Deutsche Bank DB revised down its forecast to 3.2% from 3.7%.
Goldman Sachs GS has also been much too bullish. At the end of last year, economists forecasted that GDP would grow 4% during the second quarter. But during the past month, the investment bank lowered its expectations – not once, but twice – ultimately predicting 3% growth from 3.5% with the likelihood that it may downgrade its forecast again.
While the Fed has also lowered its expectations, officials remain slightly more hopeful than the private sector, as The Wall Street Journal points out. In April, the Fed projected the economy would grow between 3.1% and 3.3% in 2011 and between 3.5% and 4.2% in 2012. But private forecasters on average predict growth of 2.9% in 2011 and 3.1% in 2012 – barely enough to keep our high unemployment rate from trending up, let alone put a meaningful dent on joblessness.
What the revisions underscore is that our soft-serve recovery is expected to get softer –just when the Fed plans to end its bond-purchasing program to help jumpstart the economy. Some might argue that QE2 has been one big failure, but given expectations of darker days ahead, the Fed would be hard-pressed to simply stand still if things get any worse.
“The very disappointing 54,000 increase in May’s US non-farm payrolls, down sharply from 232,000 gain in April, will undoubtedly lead to calls for the Fed to continue with its quantitative easing beyond the scheduled conclusion of QE2 at the end of this month,” economist Paul Ashworth of Capital Economics writes today in a research report.
There’s ever-growing evidence to be less hopeful. It was around this time last year when many thought the economy would slip back into a recession. We might have avoided a double dip so far, but one of the most critical sectors hasn’t escaped such wrath: The housing market, where the closely watched S&P Case/Shiller composite index of 20 metro areas show prices for single-family homes declined 0.2% in March from February – below the low seen in 2009 during the financial crisis.
Historically, housing and consumers have driven rapid economic recoveries, but America’s escalating private and public debt problems have continued to hamper economic growth.
To be sure, the flurry of bad economic data is partly due to temporary hiccups, including higher oil prices, natural disasters in Japan that have weighed on Japanese automakers and flooding in the South, according to Goldman’s latest GDP forecast on May 27. Even the few things going well for the economy appear ill-equipped to negate the general slowdown.
“We are somewhat puzzled by this because many of the trends that made us more optimistic around year end 2010 – progress in private sector deleveraging, easier credit and financial conditions, and an improving labor market – are still in place,” according to Goldman.
The Fed has not formally said either way whether they’d unleash another round of quantitative easing. Certainly this will depend if GDP falls further this year and whether this disappointingly weak economy will lead the Fed to panic.
Follow me on Twitter @ninhaitseng