New data showing the U.S. recovery continues to deteriorate are increasing pressure on President Barack Obama and Republican lawmakers to break their impasse over how to prop up the sputtering economy.
Separate reports on Thursday showed that that new claims for unemployment benefits hit a nine-month high last week, while factory production in the mid-Atlantic states in August slumped to its weakest level in a year. Stock markets in North America tumbled in response, with the Standard & Poor's 500 falling 1.7 per cent.
The Congressional Budget Office added to the gloom, characterizing economic growth since the middle of 2009 as "anemic" compared with previous recoveries. The non-partisan CBO predicted in its mid-year budget and economic update that U.S. gross domestic product would expand by only 2 per cent between the fourth quarter of 2010 and the fourth quarter of 2011. It also said the unemployment rate would not fall to 5 per cent from its current level of close to 10 per cent until the middle of 2014.
Not long ago, buoyed by strong first-quarter growth figures, U.S. officials were arguing that their stimulus policies had worked and that private demand was taking hold. With the unemployment rate still high and factory production sputtering, however, it appears the administration spoke too soon.
'Moving Pretty Limply'
Mr. Obama acknowledged this Thursday by urging Republicans to stop blocking legislation that would offer $30-billion (U.S.) to community banks and provide $12-billion in tax cuts for small businesses. But with mid-term elections that could shift the balance of power in Congress a little more than two months away, Republicans have little incentive to co-operate with a president whom polls suggest is getting much of the blame for the sluggish recovery. The stalemate only risks exacerbating the situation by depriving the economy of a boost and stoking uncertainty.
"We have to get the economy going," said William Gale, a senior fellow at the Washington-based Brookings Institution. "The economy is moving pretty limply right now."
The yield on two-year U.S. Treasury notes slipped to a record low as investors seeking a haven bid up prices. Crude oil declined 1.3 per cent to $74.45 a barrel on the prospect of weaker demand.
The Federal Reserve Bank of Philadelphia's factory index - which measures manufacturing output in eastern Pennsylvania, southern New Jersey and Delaware - plunged to minus 7.7 this month from 5.1 in July. A reading of less than zero signals a decline in production.
Slumping factory production suggests the burst in activity earlier this year was the result of widespread inventory rebuilding after the recession rather than a sign of consistent demand. That also helps explain the increase in jobless claims, which was bigger than all 42 economists surveyed by Bloomberg News had predicted. The U.S. unemployment rate was 9.5 per cent in August, nearing the 26-year high of 10.1 per cent.
Mr. Obama's brief remarks were a dénouement to a three-day, five-state tour that ended Wednesday. The President used the trip to defend his economic policies, castigate Republicans as obstructionists and raise money for Democratic candidates in the November elections.
"There will be plenty of time between now and November to play politics," Mr. Obama said Thursday. "But the small-business owners I met with this week, the ones that I've met with across the country this year, they don't have time for political games. They're not interested in what's best for a political party."
He also pointed out that the tax and spending measures in the small business bill have been offset by other measures to avoid a further widening of the budget deficit. That's important because Republicans have made the U.S.'s growing debt the centrepiece of their opposition to further spending programs.
Outlook
The CBO's budget outlook was little changed from its previous projections in March. This year's deficit is expected to be $1.3-trillion, slightly smaller than the 2009 shortfall, but still the second-biggest in the last 65 years, after last year's deficit.
Assuming no significant changes to fiscal policy, the budget deficit would decline to 4.2 per cent of GDP by 2012 from last year's 9.9 per cent of GDP, the CBO said. The debt would expand to 68.5 per cent of GDP.
That is a big assumption, which the CBO readily acknowledges. Along with the small-business bill, legislators when they return from summer recess next month must also decide what to do about George W. Bush-era tax cuts that are set to expire.
Some economists, including David Blanchflower, a professor at Dartmouth College and a former member of the Bank of England's Monetary Policy Committee, say the tax cuts should be extended, arguing higher taxes risk choking consumption. Former Federal Reserve chairman Alan Greenspan says the Bush tax cuts should be allowed to expire to raise money to pay down the deficit.
The CBO laid out what is at stake: Continuing the Bush tax policies would boost GDP in 2011 by 0.6 percentage points to 1.7 percentage points and would lower the unemployment rate by as much 0.8 percentage points compared with the agency's current projections.
But that would come at a price: The deficit in 2020 would equal about 8 per cent of GDP and the debt would expand to nearly 100 per cent of GDP.