Will the U.S. Economy Recover in the Second Half of the Year?

Fears of a possible slowdown of the U.S. economy have been growing. The primary reason for this is the continuing high price of energy. Ben Bernanke, chairman of the U.S. Federal Reserve Bank (FRB), stated that, “growth seems likely to pick up somewhat in the second half of the year.” However, market anxiety is not subsiding. Since this also influences the recovery of Japan’s economy, cautious economic management by the U.S. authorities would be very desirable.

The recently published establishment survey for the month of May largely indicates sluggish growth. Employment in the non-agricultural sector only increased by 54,000.

The ISM manufacturing index suffered its most drastic decline in 27 years, with retail sales falling for the first time in 11 months. It is understandable that the market is anxious about the economic future.

The second round of quantitative easing (QE2), started by the FRB in November, has created high stock prices and a weak dollar. This has led to improvements in consumer spending, exports and the employment situation. Persistently high energy prices, including petroleum, put pressure on household budgets and the revenue of corporations. The impact of the Sendai Earthquake, which wreaked havoc on supply chains, is also clearly visible.

The U.S. quarterly real economic growth rate fell from 3.1 percent (October-December 2010) to 1.8 percent (January-February 2011), and many predict it will halt at two percent in the months of April through June. Bernanke is extremely dissatisfied with the rate of economic growth, which he describes as, “somewhat slower than expected.”

His view that the inflation is “transitory,” however, remains unchanged. He expects the spike in petrol prices and the effects of the Sendai Earthquake to decline gradually. The FRB chairman is watching the price increases and preparing to discontinue QE2 by the end of June as scheduled. America’s economic outlook and the direction of its monetary policies need to be thoroughly inspected at the Federal Open Market Committee (FOMC), which will be held on June 21 and 22.

He plans to maintain the current money supply even after the end of QE2; there is a high likelihood that the zero interest rate policy will continue as well. Since the Republican opposition is loudly demanding fiscal reform, it is difficult for Obama’s Democratic administration to implement economic measures. Caution is necessary to ensure that the FRB’s policy shift does not stall the U.S. economy.

The market is still anticipating a third round of quantitative easing, a QE3. But many argue that large supplies of finance will force crude oil and grain prices up even further, worsening the economic slowdown and price rises. There are also worries that the flow of money to the developing world may be worsening inflation.

Japan must not be apathetic, either. If the American economy is slow, we will be under pressure from a strong yen against the weak dollar. Statements such as “we can rebuild the economy if manufacture normalizes” only serve to spur further confusion. Not only is it essential to accelerate the restoration and reconstruction after the earthquake, we must also strengthen the basis for long-term growth.