Now we know just how pessimistic the Federal Reserve has become about the American economy.
A combination of comments and updated forecasts contained in the minutes of the last Federal Open Markets Committee meeting, flesh out the statement issued at the end of that meeting in June which saw a softening in the language used in the statement.
Now we can see why: the FOMC members and the Fed’s staff are now seeing a slower economy, with lower inflation and unemployment that will be higher for longer.
In fact the US, while still growing, is becoming a weight on the global economy, adding to the leaden feeling coming from Europe.
Even though China is slowing, it is still supporting all of Asia, which is in turn carrying the indebted American and European economies, not to mention Japan.
Manufacturing weakened last month, especially in the north-eastern states around New York, producer prices fell last month on a headline basis, and rose 0.1% on a core basis, indicating that inflationary pressures are non-existent.
Coming the same day as June retail sales fell, the second monthly fall in a row, and after another weak jobs report for June, terrible consumer credit numbers for May and weak orders (and a bigger trade surplus), its now clear the US is heading for a second half slowdown that will be deeper than expected.
But at this stage, not a double dip into recession.
The Fed’s view on the US economy and outlook is summed up in the following sentences:
"Overall, participants continued to expect the pace of the economic recovery to be held back by a number of factors, including household and business uncertainty, persistent weakness in real estate markets, only gradual improvement in labor market conditions, waning fiscal stimulus, and slow easing of credit conditions in the banking sector.
"Participants generally anticipated that, in light of the severity of the economic downturn, it would take some time for the economy to converge fully to its longer-run path as characterized by sustainable rates of output growth, unemployment, and inflation consistent with participants’ interpretation of the Federal Reserve’s dual objectives; most expected the convergence process to take no more than five to six years.
"About one-half of the participants now judged the risks to the growth outlook to be tilted to the downside, while most continued to see balanced risks surrounding their inflation projections.
"Participants generally continued to judge the uncertainty surrounding their projections for both economic activity and inflation to be unusually high relative to historical norms."
In other words, there’s nothing much in the recent US economic history to assure the Fed’s members that the projections are right on growth and inflation (thereby confirming the belief that this recession is very different to those in 2001 and in the 1980s and 1990’s).
But more important is the ‘confession’ that the US economy won’t return to normal levels of growth, inflation and unemployment for years, possibly not until 2014-2016.
According to the minutes, the Fed predicts the US unemployment rate would be between 9.2% to 9.5% this year, slightly worse than the 9.1% to 9.5% range it forecast in April.
Unemployment was 9.5% in June, (down because 652,000 people stopped looking for work. It could have been 10% but for that fact.
More important, the Fed is gloomier about future unemployment:
It now forecasts unemployment will stay between 8.3% to 8.7% next year, up from its earlier estimate of a range of 8.1% to 8.5%, while in 2012, it sees the jobless rate between 7.1% and 7.5%. The Fed had previously said the unemployment rate could drop as low as 6.6% in 2012, so the change is material.
The Fed’s outlook on growth, as measured by the gross domestic product (GDP), was also cut. GDP is now projected to grow between 3.0% and 3.5% this year, down from an earlier forecast of 3.2% to 3.7%. In the first quarter, GDP rose at an annual rate of 2.7%.
The Fed expects the economy to grow between 3.5% and 4.2% next year, down from its earlier expectation of growth as much as 4.5%.
The central bank also trimmed its inflation outlook, an indication that it is unlikely to raise its key interest rates any time soon.
"As a result of the change in financial conditions, most participants revised down slightly their outlook for economic growth," the minutes of the June 22-23 meeting said.
"The committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably."
With home foreclosures rising, unemployment still high and credit card use falling, its now wonder retail sales remained weak in June and business inventories were all but steady in May.
Retail sales fell 0.5% last month, pulled down by weak receipts at car dealers and petrol stations. The fall was larger than the 0.2% forecast and came after the surprise 1.1% slump in may.
Excluding cars, retail sales dipped 0.1% last month after May’s 1.2% fall.
Although the report showed weakness in some key categories, "core" retail sales, which exclude autos, gasoline and building materials, rose 0.2% after slipping 0.1% in May.
But given that core sales for April and
