WSJ: Fed Darkens Its Outlook but Plans No Changes
By JON HILSENRATH And VALERIE BAUERLEIN
Federal Reserve officials see the U.S. economy settling into a disappointingly weak recovery this year and next, and say they have done all they are prepared to do to spur growth for now.
The bleak picture contrasts with the booming global economy, which is complicating the decision making of the Fed, but lifting the fortunes of U.S. companies abroad.
The central bank's policy makers substantially downgraded their projections for U.S. economic growth and unemployment, which they released Wednesday after a two-day meeting. "We don't have a precise read on why this slower pace of growth is persisting," Federal Reserve chairman Ben Bernanke said in a dreary press conference following the policy meeting. "Maybe some of the headwinds that had been concerning us—like weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues—some of these headwinds may be strong or more persistent than we had thought."
In normal times, the Fed might consider cutting short-term interest rates during an economic slowdown. But it doesn't want to risk causing more inflation, and besides, short-term rates are already near zero. The Fed said it expected rates to stay put for at least several more months. The $600 billion bond buying program started by the Fed last year will end as scheduled by month's end.
FedEx Corp., the shipping company and a bellwether for global economic growth, said Wednesday its profit jumped 33% in its second quarter from a year earlier, thanks largely to robust growth in other countries.
The International Monetary Fund estimates that the U.S. economy's growth rate—projected at roughly 2.5% in 2011 and 2012—will be less than a third of the 9.5% growth rate projected for China during that stretch.
Both the Fed and FedEx expect a pickup in U.S. growth in the second half of the year. But expectations about how much the U.S. economy can rebound have diminished.
The Fed has said that temporary factors—like Japan's tragic earthquake and Middle East turmoil—were a shock to the economy in the first half of the year that slowed growth and should subside.
Still, longer-running hurdles to growth persist, and there is disagreement over the Fed's current stance. Its latest effort to spur the economy, the $600 billion bond buying program, has gotten mixed reviews.
Mr. Bernanke said it prevented a Japan-style bout of deflation, or falling consumer prices. But Mohamed El-Erian, chief executive of Pacific Investment Management Co., or PIMCO, the giant bond investment fund, said the program "does nothing" to fix the economy's underlying structural problems.
Looking ahead, some critics say the central bank should do more to bolster the economy, perhaps by launching a third round of bond buying to keep long-term interest rates very low. But others say it has already done too much by pursuing easy money policies that could sow the seeds for higher inflation in the future.
Mr. Bernanke described the reductions in the Fed's economic growth forecasts as "fairly significant." In 2011, it expects the U.S. economy to expand by up to 2.9%. In April it saw 2011 growth of up to 3.3%, and in January it saw growth of up to 3.9%.
The Fed also revised down its 2012 outlook. Officials now see the economy growing by 3.7% or slightly less next year. For much of the year, officials had been saying growth could top 4% next year.
The unemployment rate, meantime, could linger at higher levels than previously expected. The Fed said it expected the jobless rate to be between 7.8% and 8.2% in the final three months of 2012, the final stages of what promises to be a heated presidential election centered on economic issues. In April, the Fed projected an unemployment rate between 7.6% and 7.9% by the end of next year.
Still, FedEx's fiscal fourth-quarter results Wednesday showed the company is benefitting from strong international growth, particularly in emerging markets, outpacing the U.S. economy.
Shipping volume for FedEx's key international priority shipping unit rose 6% in the latest quarter from a year earlier and one percentage point from the prior quarter, reversing the slowing expansion seen earlier in the year. FedEx said it had record profit margins during the quarter.
"International economic conditions continue to improve at a faster rate than in the U.S.," Chief Financial Officer Alan B. Graf Jr. said on a conference call.
Still, the company sounded hopeful notes about a second-half rebound in the U.S. The Memphis, Tenn.-based shipping and logistics company said it expects a 3% rise in U.S. gross domestic product in 2012, up from its forecast of 2.5% growth for this year. FedEx also expects U.S. industrial production to climb 4.3% next year and 4.2% this year.
"The near-term [economic] softness will be temporary," Chief Executive Fred Smith told analysts on a conference call, citing a retreat in oil prices since April and a recovering Japanese economy. "Going forward, we see stronger economic growth. We believe the industrial sector will lead growth in the United States and overseas in the next two years, supporting shipping demand."
Several factors are at play in the uneven global economy. One is a big rebalancing that many economists believe has been long coming. China and other developing economies have depended on exports to the U.S. to fuel their growth. Meantime, U.S. consumers feasted on cheap imports. In the process, China amassed a large trade surplus and the U.S. trade deficit soared. Global growth appears to be shifting, with the U.S. consuming less and exporting more, and the opposite happening in places like China. While healthy in the long-run because it reduces these imbalances, the change is proving to be highly disruptive, especially to the U.S. economy, which depends so heavily on domestic consumption.
Also, while the 2008 financial crisis triggered a global recession in 2009, many economies emerged from it more briskly than the U.S. because they were less burdened by heavy household debt, falling house prices and the gummed-up financial system to which Mr. Bernanke referred.
Kroger Co. conducts its own confidence surveys, and its latest readings indicate consumers are less encouraged by the economic environment and are going to keep a tighter grip on spending. When the grocer reported earnings last week, it said even higher-income customers were starting to change their behavior a bit, becoming more cautious about eating out for example. Improvement in demand for discretionary items has slowed noticeably, the company said.
"The developed world's recovery continues to be slow. It could be that we will not see its return to pre-crisis levels before 2015," Lakshmi Mittal, CEO of ArcelorMittal, the world's largest steelmaker, said at a conference in New York Tuesday.
Colgate-Palmolive Co., which garners about 50% of its sales from emerging markets, expects that most future consumer-product industry gains will come from there, too. "Everyone has been seeing a slowdown of growth in Europe and in the U.S.," Colgate's Chief Operating Officer of Emerging Markets Franck Moison said at an investor conference last week. "And everyone is seeing that because of the demographics and better GDP, the growth in the future will be in emerging markets."
In an interview with The Wall Street Journal Tuesday, Daimler AG Chief Executive Dieter Zetsche said that while Europe's debt troubles and the fiscal crisis in Greece are concerns, the biggest risk to the auto industry "is that the U.S. economy does not start [recovering] on a more consistent basis."
U.S. auto sales started off strong in 2011, rising 20% in the first quarter. But since then demand has cooled off. Shortages of Japanese-brand cars, as a result of the March earthquake, have been a factor. But so has softer consumer confidence, the sluggish housing market and the stubborn unemployment situation, according to auto industry economists.
In May, auto sales actually fell 3.7% from a year ago, and industry executives watching closely to see if how sales fare in June. Lacey Plache, the chief economist at Edmunds.com, which follows the auto industry, said she believes May's slip is likely just a hiccup. "We think sales will pick up," she said.
Even without further efforts to stimulate economic growth, the Fed's policies continue to encourage borrowing and spending and investment. The central bank reiterated Wednesday that it plans to keep short-term interest rates near zero for an "extended period." And as expected, it said it would hold on to its vast $2.832 trillion portfolio of securities and loans. As part of that strategy, it is reinvesting the proceeds from maturing bonds into Treasury bonds.
The Fed "is firmly on hold pending more information," said Jim O'Sullivan, chief economist at MF Global in New York.
Just a few weeks ago, Fed officials were focused on plans for exiting from their easy-money policies. Discussions at the April meeting focused on strategies for reducing the securities portfolio and eventually raising short-term interest rates. But a slew of discouraging economic data convinced many officials they need to stay on hold as they assess whether the bumps to growth and inflation seen in recent months are transitory, as officials believe.
—Bob Sechler, Clare Ansberry, Ellen Byron and Neal E. Boudette contributed to this article.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Valerie Bauerlein at valerie.bauerlein@wsj.com
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