Well, so much for the U.S. economy getting off to a fast start for 2011.
Economists at Bank of America cut their first-quarter growth forecast to 1.5% Monday, saying rising commodity prices and flat wages are overwhelming the latest stimulus plan and squeezing consumer spending. BofA joins Goldman Sachs in saying the economy is softening in spite of the well publicized March job gains.
The downgrade is only the latest by BofA, which came into 2011 predicting first-quarter gross domestic product would expand at a 3.3% annualized rate. It cut that forecast to 2.2% during the quarter, as the housing market weakened and durable goods orders disappointed, and trimmed its expectations again Monday.
It conclusion this time is that surging food and fuel prices are soaking up the extra funds households are getting from last year’s payroll tax cut – a trend that BofA expects to continue throughout 2011.
“Both short run and long-run forces argue for a weak consumer,” BofA economist Ethan Harris writes in a note to clients Monday.
Harris cites reduced credit availability, weak wage growth, a higher saving rate and unease over the fate of government benefit programs. Those factors were already in place late last year, when he and others were predicting the U.S. economy would rocket out of the gate at a 3%-plus clip in the first quarter.
But the surge of gasoline prices above $3.50 a gallon and the steady rise in the market price of food commodities such as corn, wheat and sugar have blunted the force that many economists expected to drive growth in 2011 – the stimulus the government extended households by cutting payroll taxes.
Meanwhile, those who see rising prices translating into higher labor costs – the sort of second-order effect that central bankers keep an anxious eye peeled for — are simply not living in the same world as you and me. Unemployment is still near 9%, companies are still sitting on cash rather than hiring and few people are getting raises.
“The spike in energy prices is not causing stronger ‘cost of living’ wage increases; it is causing cuts in real pay,” Harris says.
He says squeezed consumers will keep growth tepid for the rest of 2011, though BofA is expecting the economy to expand 2.6% this year, as hiring picks up. Others see the same exasperating dynamic at work.
“Overall the March employment report provides further evidence of a broad-based hiring dynamic that is capable of generating self-sustaining growth,” says BNP Paribas U.S. economist Julia Coronado. “However there is still considerable slack that is restraining wage growth pointing to a growing conflict between firms and consumers in absorbing rising commodity prices.”
Growing conflict, just so. That, rather than the return of the consumer, is looking like the theme of 2011.
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