US: Economy To Be Downgraded This Week

A big week for the US economy, or rather a week when the current gloomy sentiment about the outlook for the US economy will be further tested.

The Fed is expected to cut its outlook for the economy and its growth forecasts midweek, while chairman Ben Bernanke will speak at his second press conference after the meeting ends early Wednesday morning.

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Then on Friday the third estimate of first quarter economic growth will be released. That might see a small increase, to 1.9% annual for GDP, from 1.8%, which will be hardly convincing.

The Fed's view from its April forecasts was that the US economy will grow between 3.1% and 3.3%.

Marketwatch points out that is higher than all 51 economists polled in the early June edition of Blue Chip Economic Indicators, where the average growth rate was projected at 2.6%.

On Friday night, the International Monetary Fund cut its forecast for US growth in 2011 for the second time in two months.

In an update of its April World Economic Outlook, the Fund said it now saw the US economy growing by 2.5% this year, down from 2.8% projected in April.

The IMF forecast for 2.7% growth in 2012 was lower than the previous estimate of 2.9%

In a separate report, the IMF narrowed its deficit forecast for the US this year to 9.9% of gross domestic product, from an April estimate of 10.8%, thanks to faster growth in tax revenues and lower Federal spending.

That's a small bit of good news.

The bad news is that the IMF sees little chance of a sharp rise in growth for at least the next 18 months to two years, which means there won't be any significant improvement in the most pressing of all America's problems, the high level of unemployment.

In many ways the Fed's forecasts for unemployment this week will be more important than the estimates for further growth and inflation.

The Fed predicted an unemployment rate between 8.4% and 8.7% by the end of the year, compared to the 9.1% reported in the May jobs report earlier this month.

If the Fed ups its estimate, that's bad news.

The AMP's chief Economist Dr Shane Oliver said in his weekly note on Friday: "We expect no change in monetary policy settings.

"More importantly the Fed is likely to revise down its growth expectations for this year, but it is unlikely to be enough to prompt the Fed to flag another round of quantitative easing (i.e. QE3).

"This could cause a rocky ride for share markets to the extent some investors may be looking for comfort from additional quantitative easing."

So when the Fed unveils its quarterly growth, inflation, and unemployment forecast on Wednesday, along with an interest rate decision, it's more than likely to be projecting a slower pace of activity.

Chairman Ben Bernanke said in a speech two weeks ago, "U.S. economic growth so far this year looks to have been slower than expected". He also called the recovery "uneven" and "frustratingly slow".

Part of the US growth slump reflects temporary effects: the Japanese-earthquake-induced supply chain disruption, and the bad weather in the South.

And high oil prices, although they have fallen to well under $US95 a barrel, dragging down petrol prices in the US in time for the summer driving season.

Richmond Fed President Jeffrey Lacker made that clear in a recent speech.

"Although the factors affecting the first-quarter slowdown - including high energy prices, bad weather and natural disasters around the globe - may prove temporary, the inability so far of the expansion to gain more traction has been frustrating," Lacker said.

And New York Fed President William Dudley said recently that downside risks to the economy have increased.

In particular, the factory sector that led the recovery suddenly has slowed, a big worry as that was the best performing sector of the economy, lifting output and employment.

Much of this was driven by the cheaper dollar making American exports cheaper.

But as the last two monthly surveys of manufacturing activities revealed, plus regional surveys of the sector from the Fed, US manufacturing is slowing rapidly. Any sign of a rise in job losses from the sector in the next couple of months will spark another round of fear and loathing in the US.

Complicating matters will be the continuing debate over spending and the debt ceiling, a political brawl that is likely to go down to the wire and the August 2 deadline.

On top of that will be the speculation that if the economy continues sliding the Fed will be pressured into a third round of easing to hold off the pain.

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