Economic Indicators Warn of High Recession Risk

Thursday, 22 Sep 2011 11:17 AM

 

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The economy will likely expand this fall at a weak pace, but the risks are rising of another recession, a private research group says.

The Conference Board said Thursday that its index of leading economic indicators rose 0.3 percent in August, the fourth consecutive increase.

Still, the improvement in August wasn't broad-based and mostly stemmed from an improvement in financial conditions, such as low interest rates.

"There is growing risk that sustained weak confidence could put downward pressure on demand and business activity, causing the economy to potentially dip into recession," said Ken Goldstein, an economist at the Conference Board. "While the chance of that happening remains below 50-50, the odds have certainly increased in recent months."

Only four of the 10 measures that the Conference Board uses to compile its index showed improvement in August. Two were related to financial conditions. Building permits also rose.

Without the Federal Reserve's efforts to keep rates low, the index would likely have fallen last month, economists said.

Declining factory orders, plummeting consumer confidence, and rising unemployment benefit applications were among six measures that weakened in August.

Recent economic reports suggest the economy is barely growing. Retail sales in August were flat, indicating consumers are holding back on spending. Sharp drops in the stock market last month and political bickering over the borrowing limit sent consumer confidence indexes plunging to the lowest levels since the recession.

Many economists put the odds of another recession at about one-third.

Employers failed to add any jobs in August, and the unemployment rate remained high at 9.1 percent. Applications for unemployment benefits fell last week, the Labor Department said Thursday, but they have ticked up since last month. That's a sign layoffs are rising and jobs are still scarce.

The Fed said Wednesday that the economy will likely improve in the coming quarters, but added that there are "significant downside risks" to its outlook. That includes "strains in global financial markets," a reference to Europe's debt crisis.

Most economists think growth will pick up some in the second half of the year, to just below 2 percent. That would be an improvement from a pace of only 0.7 percent growth in the first six months of this year. But that's far below the 5 percent rate that most economists say is needed to bring down the unemployment rate.

The Fed launched its latest effort to boost growth Wednesday. The central bank said it will try to push long-term interest rates lower and make consumer and business loans cheaper by shifting $400 billion out of short-term Treasury securities and into longer-term bonds.

It also said it will reinvest the proceeds from its maturing mortgage-backed securities into new mortgage-backed bonds. That should reduce mortgage rates.

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