Moody’s Analytics said its near-term outlook for the U.S. economy has fallen significantly in the past month wake of the debate over the U.S. debt ceiling and the downgrade of the nation’s credit ratings by Standard & Poor’s .

Moody’s Analytics, a sister company to credit-ratings company Moody’s Investors Service, now expects real gross domestic product to increase at an annualized rate of about 2% in the second half of this year and just over 3% next year, compared with its estimate a month ago for growth of 3.5% for the second half of this year and through 2012.

The firm attributes most of the expected decline to a loss of business, investor and consumer confidence, noting the economy’s improving fundamentals such as the strengthening of business’s balance sheets and consumers’ strides in cutting household debt.

The credit-rating company also said it thinks the odds of a renewed recession over the next 12 months — now at 1 in 3 — will increase if stock prices continue to fall. Moody’s maintains that the odds of a renewed recession rise with each 100-point drop in the Dow Jones Industrial Average. While Moody’s expects the economic recovery will continue, prospects for economic growth and job creation have “diminished substantially.”

Though the U.S. economic recovery looked healthy at the beginning of the year, a series of events have hurt business, consumer and investor confidence, Moody’s said. These include surging prices for food and gasoline, natural disasters in Japan, Europe’s debt crisis and, most recently, the U.S. debt woes.

The economy needs to grow 2.5% to 3% a year to create jobs fast enough to keep the unemployment rate stable, Moody’s said. However, Moody’s said it doesn’t think this will happen soon.

This Wednesday, July 20th, I will be appearing again on Liberty Talk Radio. I am determined to get some more folks to call in – so here it is. Anyone who calls in and mentions this email will get a complimentary three-month subscription to The Centsible Investor! How’s that for simple? See below for call-in information.

Among other things, Joe and I will be discussing the idea of leading, coincident, and lagging economic indicators. The Conference Board has been attempting to dazzle the markets and goose consumers with reports of good leading indicators for many months now, but the question remains leading to what?

We’ll take this topic as a follow-up to my August 21, 2009 editorial regarding the various types of indicators and their relevance in terms of forecasting. The rest of the show will be dedicated to your questions, plus some comments and observations I’ve gotten from people on Main Street over the past several months. We’ll be more than happy to take your calls. You can reach the show directly at (646) 652-4620 or toll-free at (888) 773-4496. You can also listen at his Blog Talk Radio Page.

June 6 (Bloomberg) — A string of disappointing economic data capped by last week’s jobs report is prompting even some of the more optimistic economists to question the durability of the U.S. recovery.

While analysts such as Stephen Stanley of Pierpoint Securities LLC and Michael Feroli of JPMorgan Chase & Co. still see growth strengthening in the months ahead, they voiced concern that the lull in the economy may prove prolonged, leaving it more vulnerable to external shocks or policy missteps.

“We’ll do better in the second half,” said Feroli, chief U.S. economist for JPMorgan in New York and a former member of the Federal Reserve’s forecasting team. “That said, the concern is that there’s enough weakness that could feed on itself.”

Policy makers have limited leeway to respond to the accumulating signs of slowdown. The Fed is completing its purchase of $600 billion of Treasury securities this month, leaving it with a $2.77 trillion balance sheet that some central bankers fret is already too big.

The record $1.6 trillion federal budget deficit that the White House projects this year has left President Barack Obama with little room to use fiscal policy to spur the economy, especially with Republican lawmakers calling for cuts in spending, rather than more investment.

“Our economy is not creating enough jobs, and Democrats’ binge of taxing, spending, borrowing and over-regulating is a big part of the reason why,” John Boehner, speaker of the House of Representatives and a Republican from Ohio, said in a statement on June 3.

Jobless Rate Climbs

Payrolls grew at the slowest pace in eight months in May and the unemployment rate unexpectedly climbed to 9.1 percent from 9 percent in April, Labor Department figures released on June 3 showed. The 54,000 rise in jobs followed a 232,000 gain in April and was below the 165,000 median increase forecast by economists in a Bloomberg News survey.

The jobs numbers followed a series of economic statistics suggesting that the economy is decelerating. Manufacturing grew at its slowest pace in more than in year in May, according to Institute for Supply Management data released last week. Consumer spending, which accounts for 70 percent of the economy, rose less than forecast in April as households felt the pinch of grocery and energy costs, a Commerce Department report showed.

Stanley, who is chief economist at Pierpoint in Stamford, Connecticut, said he is betting that the softness in the economy will prove to be temporary, the result of a surge in gasoline prices that has since subsided and supply disruptions from the March earthquake and tsunami in Japan. Like Feroli, though, he is becoming more concerned.

Animal Spirits

“I’m starting to get worried,” Stanley said. The economy’s “animal spirits are fragile.”

Investor concern over the economy sent stocks down. The Dow Jones Industrial Average lost 97.29 points, or 0.8 percent, to 12,151.26 in New York on June 3, extending a fifth straight weekly loss, its longest slump since 2004. The Standard & Poor’s 500 Index dropped 1 percent to 1,300.16. Treasuries rose, pushing yields on two-year notes down three basis points to 0.43 percent, the lowest this year.

Feroli and Stanley started the year more optimistic than many of their peers. The economy was forecast to expand 3.1 percent in 2011, according to the median estimate of economists in a Bloomberg News survey published Jan. 13. At the time, Stanley’s projection was 3.8 percent, while Feroli predicted 3.3 percent growth. Stanley has since cut his forecast to 2.9 percent while Feroli has lowered his to 2.4 percent.

Not Alone

The two are not alone in shaving their forecasts. Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, projected growth of 3.3 percent for 2011 at the start of the year, on a fourth-quarter over fourth-quarter basis, and has reduced that to 3.1 percent.

Dean Maki, chief U.S. economist at Barclays Capital Inc., has trimmed his 2011 forecast to 2.5 percent, down from a 3.1 percent estimate at the beginning of the year.

Economists aren’t the only ones with reason to worry: the latest jobs numbers pose a challenge to President Obama, whose re-election prospects hinge on pushing the jobless rate lower.

“The danger is that if we continue to take two steps forward, two steps back, people are going to continue to suffer a high level of economic anxiety,” said Bill Carrick, a Democratic strategist. “There’s no way that can be good politically for the president.”

Austan Goolsbee, Obama’s chief economist, said the jobs report represents a “little bump” in the road to recovery and that the broader trends are “substantially more positive” than when Obama took office in January 2009.

Facing Headwinds

“We should never read too much into any one month’s report,” Goolsbee, chairman of the Council of Economic Advisers, said in a June 3 interview on Bloomberg Television. “No doubt we face some headwinds.”

The slow pace of the recovery doesn’t come as surprise to Kenneth Rogoff, a former International Monetary Fund chief economist who is now a professor at Harvard University in Cambridge, Massachusetts. History shows that it takes time for economies to recover from financial crises like the one that hit the U.S.

Goldman’s economist Jan Hatzius looked at the University of Michigan and Thomson Reuters poll, which asks consumers whether they believe their family income will rise more than inflation in the next 12 months. Hatzius applied a six-month moving average to smooth out the data and found that wage pessimism is at its lowest in more than two decades.

“Households are already very pessimistic about future real income growth,” wrote Goldman’s economist to clients. “A slowdown in job growth would presumably translate into a further deterioration in (expected and actual) real income growth. This would heighten the downside risks to our current forecast that real consumer spending will grow 2.5 percent to 3 percent over the next year and might call for another downward revision to our forecast for US GDP growth in 2011 and 2012.”

Real hourly wages have dropped 2.1 percent on an annualized basis over the past six months, a rate of decline not seen in 20 years, according to Goldman. This analysis is backed up by the other most-watched consumer survey from the Conference Board, which indicated earlier this week that the proportion of consumers expecting their incomes to increase was below 15 percent in May.

“I am much more concerned that the second half resurgence we all expect never arrives and by early 2012 we are in a recession,” said Joe Terranova, chief market strategist for Virtus Investment Partners and a ‘Fast Money’ trader.
yield broke below 3 percent Wednesday as investors bought bonds as a safehaven in case of the slowing economy.

The fact that income expectations are so low, makes the jobs outlook that much more important, argues Goldman and other investors. These same surveys show that consumers are not nearly as pessimistic about job growth. So once enthusiasm on the labor front is dented at all, then all aspects of consumer confidence are lost.

“The labor market is particularly important because household finances currently seem even more dependent on job growth than they are normally,” said Hatzius.

A typical recovery pattern goes like this: stock market bottoms, economic growth bottoms and then hiring and wage increases return. What’s unique and scary about this recovery is that the last piece of the recovery is not there.

In the 2001 recession, the country lost 2 percent of jobs from peak employment and then made that back in a 48- month cycle, according to data from money management firm Trutina Financial. In 1990, the jobs lost during the recession were recovered in 30 months. Right now, about 38 months from peak employment during the housing boom, there are still six percent fewer jobs out there. Making up that amount of jobs in 10 months or less would be unprecedented, if not impossible.

“The crawl out of this economic ditch is going to be long and slow,” said Patty Edwards, chief investment officer at Trutina. “Even if they’re employed, many consumers aren’t earnings what they were two years ago, either because they’re in lower-paying jobs or not getting as many hours.”

May 27 (Bloomberg) — The world economy is losing strength halfway through the year as high oil prices and fallout from Japan’s natural disaster and Europe’s debt woes take their toll.

Goldman Sachs Group Inc. now expects global economic growth of 4.3 percent in 2011, compared with its 4.8 percent estimate in mid-April, while UBS AG has cut its projection to 3.6 percent from 3.9 percent in January. Downside risks also include a shift to tighter monetary policy in emerging markets.

“The world economy has entered a softer patch with the incoming growth data mostly disappointing,” said Andrew Cates, an economist at UBS in Singapore. “We suspect this soft patch will endure for longer.”

Data this week backed that outlook as reports showed Chinese manufacturing expanding at the slowest pace in 10 months, orders for U.S. durable goods dropping the most since October and confidence among European executive and consumers sliding for the third straight month. Investors are tuning in, pushing the MSCI World Index of stocks in advanced economies down 4.2 percent this month.

Goldman Sachs economists led by Dominic Wilson and Jan Hatzius said in a May 25 report they now expect “less upside in equities” with their colleagues reducing price targets for most of the major regions even though they still anticipate another 10 percent gain in developed markets this year.

The concern comes as leaders from the Group of Eight conclude a summit in Deauville, France, with a statement that declared the world economy is “gaining strength” and that its recovery will pave the way to debt reduction. They identified commodity prices as a “significant headwind” to expansion.

The MSCI World Index rose 0.6 percent at 6:15 a.m. in New York today, paring its weekly lose, after the G-8 statement.

Energy Costs

Oil prices reached a 31-month high of $114.83 on May 2 as the war in Libya cut supply. Goldman Sachs this week raised its forecast for Brent crude at the end of 2012 to $140 a barrel from $120, suggesting the price’s path will be 20 percent higher than anticipated at the start of the year. That’s enough to shave 0.5 percentage point from U.S. growth over two years and a little less in other wealthy nations, they said.

The fallout from Japan’s earthquake, tsunami and nuclear disaster may also be reverberating, said David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York, who calculates the international expansion will duck beneath its long-term trend this quarter.

Japan’s Consumers

Japan’s retail sales fell 4.8 percent from a year earlier in April, the Trade Ministry said in a report released today, underscoring the impact on consumers from the March disasters and forecasts for gross domestic product to shrink for a third straight quarter in the three months to June.

While spillover to Asia’s emerging economies has been “surprisingly modest,” Hensley said supply-chain disruption is “likely to rise with time” as Japanese production and exports remain depressed before beginning to recover around September.

“The global economy is losing momentum,” Hensley said.

China, after powering the global economy out of the 2009 recession, may also be slowing. The world’s No. 2 economy has raised interest rates four times since mid-October and boosted banks’ reserve-requirement ratio eight times since November, most recently on May 12.

ING Groep NV this month cut its estimate for China’s full- year growth to 9.8 percent from 10.2 percent and reduced its second-quarter forecast to an annual pace of 9.6 percent, from 10.3 percent. Credit Suisse Group AG adjusted its 2011 expansion estimate to 8.8 percent from 9.1 percent. China’s stocks this week fell by the most in eleven months.

Central Banks

“Investors are worried that the tightening is overdone and concerns have widened to a slowdown in earnings and economic growth from just inflation,” said Wang Zheng, chief investment officer at Jingxi Investment Management Co. in Shanghai, which manages about $120 million.

Emerging-market central banks elsewhere are also throttling back. Those in India, the Philippines, Chile, Poland, Peru and Malaysia all raised their benchmark borrowing costs this month to cool price pressures.

Europe’s 18-month debt crisis is another brake on growth as its policy makers prepare a second aid package to save Greece from default and other so-called peripheral economies deploy austerity measures to slash debt. At the same time, the euro’s 6 percent gain against the dollar since the start of the year and the European Central Bank’s shift toward tighter monetary policy may be slowing expansion elsewhere in the region.

Impact on Companies

The global economy’s change in tone is reflected in some company announcements. Chicago-based Boeing Co., the world’s largest aerospace company, said it received two orders last month compared with 98 in March. Hermes International SCA, the Paris-based maker of Birkin handbags, said on May 11 that its forecast for 2011 is “clouded by geopolitical and economic uncertainties.”

The slower growth may still be short-lived and by cooling the oil price could even provide some support for consumers and inflation relief for central bankers, allowing them to keep monetary policy looser for longer. Other reasons for confidence include job growth in the U.S., expectations for an infrastructure-led bounce in Japan’s economy, supportive equity markets and a likely recovery in inventory accumulation, said Hensley at JPMorgan Chase.

Economists Nariman Behravesh and Sara Johnson of IHS Inc. said in a May 24 report that while they expect worldwide growth to slow to 3.5 percent this year from 4.1 percent in 2010, it will rebound to 4 percent in each of the next two years as the pain of austerity, Japan’s woes and high oil prices passes.

“Assuming these shocks do not get any worse and that the world economy is not hit by additional unforeseen jolts, chances are good that the period of slow growth will be relatively short and that the recovery will pick up steam again,” they said.

Doubts have been cast over the strength of the US economic recovery after output grew at an annualised rate of only 1.8 per cent in the first quarter.

A surge in oil prices held back consumption growth, while public spending fell at every tier of the US government.

Most analysts expect the weakness to be temporary but government support for the economy will start to fade later in the year, so the lack of any acceleration in growth points to years of further pain for the world’s largest economy.

At this stage of a recovery, growth often rebounds by between 4 and 5 per cent. Expansion of less than 2 per cent will not create enough jobs to keep up with population growth and cut the US unemployment rate of 8.8 per cent.

The dollar fell further on release of the growth numbers as investors judged that weak growth would cause US interest rates to stay lower for longer.

Although overshadowed by the growth figures, there was another disturbing economic release on Thursday. Initial claims for unemployment insurance rose to 429,000 and the four-week average rose back to more than 400,000. Jobless claims had been on an improving trend and the reversal suggests that momentum in the labour market might have stalled.

Economists attributed some of the growth weakness to a temporary decline in defence spending and weather-related weakness in construction output.

Sales by consumer goods companies, led by Procter & Gamble, the world’s largest, provided fresh evidence of consumer weakness and, in some product categories, suggested consumers felt more cash-strapped than last year.

Growth was also held back by high petrol prices, which kept growth in real personal consumption spending to an annualised 2.7 per cent, compared with 4 per cent in the fourth quarter of 2010.

Prices increased by 3.8 per cent but, even excluding food and energy costs, they rose at a rate of 1.5 per cent, the fastest since 2008.

Nariman Behravesh of IHS Global Insight said: “While higher gasoline prices are eroding consumer confidence, an improving jobs market is supporting consumer spending. Meanwhile, businesses remain optimistic and are spending more freely on both new technologies and new hires.”

The Federal Reserve on Wednesday revised its outlook for the rest of the year. Officials now expect the US economy to grow at a rate of between 3.1 and 3.3 per cent in 2011, compared with an earlier forecast of 3.4 to 3.9 per cent.

April 28 (Bloomberg) — The U.S. economy grew at a slower pace than forecast in the first quarter as government spending declined by the most since 1983.

Gross domestic product rose at a 1.8 percent annual rate from January through March after a 3.1 percent pace in the last three months of 2010, the Commerce Department said today in Washington. Economists projected 2 percent growth, according to the median estimate in a Bloomberg News survey.

To keep spurring the expansion, Federal Reserve policy makers said yesterday they’ll complete their $600 billion round of stimulus through June. While slower than the previous three months, a reflection of higher gasoline prices, consumer spending climbed more than projected in the first quarter.

“We’ve sputtered a bit here, especially coming off a relatively strong fourth quarter,” said Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who accurately forecast first-quarter growth. Even with the higher costs for fuel and food, “consumers are going to continue to spend. Growth should pick up toward the 3 percent level” later this year, he said.

GDP estimates from 80 economists surveyed by Bloomberg ranged from 0.5 percent to 3.5 percent. The first-quarter pace was the slowest since April through June of last year. For all of 2010, the world’s largest economy expanded 2.9 percent, the most in five years, after shrinking 2.6 percent in 2009.

New applications for jobless benefits unexpectedly rose last week to the highest level in three months. Unemployment insurance claims jumped by 25,000 to 429,000, the Labor Department said. The government anticipates a drop in unadjusted claims during the week leading up to the Easter holiday, something that didn’t happen this year, a Labor Department spokesman said.

Stock-Index Futures

Stock-index futures dropped after the reports and Treasury securities rose. The contract on the Standard & Poor’s 500 Index fell 0.2 percent to 1,348.6 at 8:53 a.m. in New York. The yield on the benchmark 10-year Treasury note, which moves inversely to prices, fell to 3.32 percent from 3.36 percent late yesterday.

Slower first-quarter growth explains why the Fed trimmed its 2011 forecast to 3.1 percent to 3.3 percent, according to its latest so-called central tendency, released yesterday. In January, the central bankers projected 3.4 percent to 3.9 percent expansion.

“I would say roughly most of the slowdown in the first quarter is viewed by most on the committee as transitory,” Fed Chairman Ben S. Bernanke said at a news conference in Washington following the central bank’s policy meeting yesterday.

Consumer Spending

Household purchases, which account for about 70 percent of the economy, rose at a 2.7 percent pace last quarter after a 4 percent gain in the final three months of 2010.

The gain in consumer spending from January through March compared with a 2 percent median forecast in the Bloomberg survey. Purchases added 1.91 percentage points to growth. (Higher gas and food prices account for ALL of this increase). This is not ‘good’ as the spinmeisters would have you believe.

Government purchases fell at a 5.2 percent annual rate, the biggest drop since 1983, after a 1.7 percent decrease in the fourth quarter. National defense spending dropped at an 11.7 percent pace, the most since 2005. Federal government spending fell the most in 11 years.

Residential construction fell at a 4.1 percent rate, while the trade deficit subtracted 0.1 percentage point from GDP, today’s report showed.

Manufacturing Gains

Manufacturing industries, which account for 11 percent of the economy, are likely to remain at the forefront of the recovery on growing demand from abroad and the need to replenish inventories. This is another lie; the sector is shedding jobs – again.

Inventories last quarter were stocked at a $43.8 billion pace, compared with a $16.2 billion rate in the fourth quarter. Excluding inventories, the economy climbed at a 0.8 percent annual rate from January through March, the slowest since the third quarter 2009.

Spending on equipment and software climbed at an 11.6 percent annual last quarter, up from 7.7 percent the previous three months.

“After a period of widely fluctuating demand in late 2008 through last year, we anticipate that 2011 will be the beginning of a period of sustained growth in our truck engine markets in the U.S.,” Thomas Linebarger, chief operating officer of Cummins Inc., said on an April 26 teleconference.

The Columbus, Indiana-based maker of diesel engines projects 2011 sales to be up 30 percent from last year, compared with a previous forecast for a 20 percent gain.

UPS Shipments

United Parcel Service Inc., the world’s biggest package- delivery company, this week bolstered its full-year forecast after revenue per package climbed in all its sectors during the first quarter.

The gains reflect “some of the increased velocity in the core economy with manufacturing and finished goods,” Kurt Kuehn, chief financial officer of the Atlanta-based firm, said in an April 26 telephone interview.

UPS and FedEx Corp. handle goods ranging from financial documents to pharmaceuticals and industrial parts, making them economic bellwethers.

The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed to a 1.5 percent annual pace. The Fed’s longer term projection for inflation is a range of 1.7 percent to 2 percent. Rising oil and food costs may push up the prices of other goods and services.

Fed on Inflation

“Increases in the prices of energy and other commodities have pushed up inflation in recent months,” the Federal Open Market Committee said yesterday in its statement after a two-day meeting in Washington. Still, “longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued,” the Fed said.

Bernanke has signaled that the Fed will maintain record stimulus until job growth accelerates and the recovery is robust enough to withstand tighter credit.

The levels are not a forecast – indeed, executives tell me they do not expect such hefty prices – but do signal a “worse case scenario” for which oil, metals and food commodities traders need to prepare.

“Can we reach $175? I don’t think so,” says a trading executive. “But there is a chance of a spike to that level for one or two days if something happens in Saudi Arabia.” The same reasoning justifies tests for copper at $12,000 a tonne (think of an accident at a big mine in Chile) or corn at $10 a bushel, which could, for example, be caused by bad weather during the US planting season in May and June.

The stress tests have become more common at the physical trading houses in London, Geneva and Singapore. There is reason for it. Contrary to popular wisdom, high commodities prices are bad for pure traders: they consume lots of capital as houses need to finance their cargoes and post more collateral with exchanges for their hedges, leading to a decline in returns.

Take oil: when prices were around $50 a barrel in 2009, traders needed just $100m of capital to finance a supertanker. At current prices, they need about $250m. Not surprisingly, trading houses are now on the capital market raising multibillion dollar one- year and three-year credit lines.

Some traders are also tapping the public bond market – Trafigura did last year – while others are turning to private placements in the US.

A banker who works closely with some of the world’s largest trading houses jokes that money, rather than oil, copper or corn, is the commodity in shorter supply. Of course, it is an exaggeration: the banks’ appetite to finance the houses is very strong and traders are raising money with little trouble. But the comment holds some truth: traders will need lots of credit this year.

I do not expect that any trading house will run into trouble: the rollercoaster market of 2008 cleared the market of the small players unable to compete because of lack of credit. Traders have also learnt from the experience, with more standby lines with banks.

Moreover, the more vulnerable smaller players that rely on “transactional finance” are protected. Yes, they need more credit, but the value of the commodities they move and that they pledge as collateral has also increased, offsetting the blow.

Nonetheless, trading executives say they are thinking twice about some trades and acknowledge that what was profitable a few months ago on the basis of risk-adjusted return on capital is no longer worthwhile because of higher credit needs.

All in all, the rise in commodities will make the life of chief financial officers and treasurers at the trading houses more difficult. With banks happy to continue lending and credit still cheap, traders will be able to weather the storm. But if access to credit gets tighter, the smaller players, which have been able to grow rapidly over the past five years, will end up as the prey of larger, well financed rivals.

From ZeroHedge..

At 64.2%, the labor force participation rate (as a percentage of the total civilian noninstitutional population) is now at a fresh 26 year low, the lowest since March 1984, and is the only reason why the unemployment rate dropped to 9% (labor force declined from 153,690 to 153,186). Those not in the Labor Force has increased from 83.9 million to 86.2 million, or 2.2 million in one year! As for the numerator in the fraction, the number of unemployed, it has plunged from 15 million to 13.9 million in two months! The only reason for this is due to the increasing disenchantment of those who completely fall off the BLS rolls and no longer even try to look for a job. Lastly, we won’t even show what the labor force is as a percentage of total population. It is a vertical plunge.