The IMF downgraded its forecast for US economic growth in 2011 to 2.5 percent from its prior forecast of 2.7 percent. The 2012 growth forecast was cut to 2.7 percent from 2.9 percent.
The agency was troubled by the slew of weak US economic data that came out in the second quarter for everything from the real estate sector to the jobs market.
Three year after the height of the global recession, most countries around the world are recovering well.
The IMF noted that many emerging market countries are above their pre-recession economic outputs. Advanced economies like Canada and Australia are buoyed by soaring commodity prices. The IMF even projected Europe to do better than expected on strong investments in Germany and France.
The only country the IMF was more downbeat on than the US was the disaster-struck Japan.
So what’s wrong with the US economy?
To be fair, the US isn’t doing horribly. A growth rate of 2.7 percent is still above those of the euro area and UK. But many had expected the US economy to come out swinging in 2011 and 2012.
Historically (post WWII), the US has posted growth rates of 5 to 7 percent in the first few years after a recession. The 2008-9 recession was the worst since the Great Depression, but many thought QE2 and President Obama’s tax deal with the Republicans late in 2010 provided the extra boost to guarantee a strong economy.
Now, many are puzzled at yet another soft patch in 2011 (the first was in 2010).
Some will claim to know the answer. But the honest analysts, economists, and traders I’ve come across admitted they can’t really explain the 2011 soft patch.
The mysterious nature and uncertainties surrounding it is one reason for the poor performance of risk assets in June and the dive back into Treasuries.
Fearful questions are once again floating around.
Is the US economy really dependent on government stimulus? Is this the New Normal of weak US economic growth? Has the massive 30-year supercycle of credit expansion ended? Is the US private sector done?
Until these fears are calmed, investors and businesses will continue to remain conservative and watchful.