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“U.S. economy: Manufacturing slowdown the latest sign the recovery is faltering

Paul Sancya/ AP - Assembly line workers Dave Zamora, left, and Steven Saleem work on a pre-production Chevrolet Sonic at a General Motors plant. U.S. manufacturing activity expanded in May at the slowest pace in 20 months.

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By Neil Irwin, Published: June 1

The economic recovery is faltering, and Washington is running out of ways to get it back on track.

Two bright spots over the past few months — manufacturing and job creation by private companies — both slowed in May, according to new reports Wednesday. The data come amid other reports of falling home prices, declining auto sales, weaker consumer spending and a rising pace of layoffs.

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Stocks tumbled Wednesday on the discouraging economic news, with the Standard & Poor’s 500-stock index off 2.3 percent. It was the index’s steepest decline since August.

Just a few months ago, the economy seemed poised to finally strengthen. Business confidence was rising, and extensive government efforts to foster growth were underway. But those hopes are being dashed. Forecasters who once projected economic growth of 3.5 to 4 percent for the year have slashed their estimates with each round of disappointing numbers.

Instead of accelerating, the U.S. economy is puttering along at a growth rate of 2 to 3 percent — barely enough to bring down joblessness slowly, if at all.

“The recovery continues, but at a disturbingly slow pace,” said Diane Swonk, chief economist for Mesirow Financial.

The weak growth comes despite government efforts to boost it: a payroll tax cut that took effect in January and an initiative by the Federal Reserve to pump $600 billion into the ailing economy. But the Fed is unlikely to take further action, and Congress is focused on reducing the budget deficit, not tax cuts or new spending that might spur economic activity.

The worsening economic prospects reflect, in part, the effects of a spike in oil prices this year and of the Japanese earthquake in March, which caused disruptions for some U.S. manufacturers. But it is the underlying weakness of the U.S. economy that may have allowed these developments to knock the recovery off course.

“We’re structurally in a place where we’re going to be more vulnerable to downside risks than if the economy was growing strongly, and that’s what we’re seeing right now,” said Robert A. Dye, senior economist at PNC Financial Services Group. “We’re not far above stall speed.”

The signs are not all bad. The stock market has held up well in recent weeks, aside from Wednesday’s decline. Prices for oil and other globally traded commodities are down substantially since the end of April, a decline that will eventually mean lower prices for gasoline and other goods, and the impact of the earthquake will subside as factories in Japan reopen. Moreover, U.S. businesses this year have been cutting inventories that they will eventually need to rebuild, spurring economic activity.

But the outlook, as projected by economic forecasters and implied in government data, is clearly dimming. Economists at J.P. Morgan Chase on Wednesday lowered their projection for 2011 growth in gross domestic product to 2 percent. A week ago, those same economists had reduced the figure to 2.5 percent.

Reflecting rising pessimism, the interest rate that the Treasury Department must pay to borrow money for 10 years fell to 2.95 percent Wednesday, from 3.06 percent on Tuesday and 3.74 percent in February. As investors grow anxious, they are moving money into the safety of government bonds. Investors are also anticipating that the Federal Reserve will seek to support the recovery by keeping interest rates low for longer than previously expected.”