U.S. Growth: Slow and Volatile

Breathe, everybody.

Wednesday’s stock market dive is probably an overreaction to an admittedly ugly week of economic data—in the same way that market exuberance in recent months was probably an overreaction to the best job-creation streak the United States has seen in years.

(RELATED: U.S. Adds Fewer Jobs Than Expected in May)

Stocks fell throughout the day, and Treasury bonds hit their lowest yields of the year, in what appeared to be pent-up market reaction to a wave of economic indicators all falling short of expectations. The disappointing numbers included consumer confidence, housing sales and prices, several manufacturing indexes, and most jarringly, the ADP report that private payrolls added only 38,000 jobs in May. 

(RELATED: Stocks Fall 2.22 Percent, Worst Day Since August)

At this point, we’re one bad Labor Department release on Friday away from some genuine panic about the state of the recovery. Even a net gain in the five-figure range would do the trick.

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Reality is a little more positive and a lot more complicated than that. Wall Street analysts are fairly united in their view that the recovery has entered a “soft patch,” just like it did last year, and that sooner or later, growth and job-creation are on track to pick up again. Several analysts and columnists have been reminding Americans that recoveries from financial crises can often feel like stop-and-go traffic on the freeway.

For now, the economic brakes seem to be pumping. The 2010 slowdown flowed from worries over Europe’s sovereign debt crisis. This one is likely a combination of several factors. The spike in oil and food prices has spooked confidence—though consumers are still spending apace, dipping into their savings to keep up—and may be driving businesses to scale back hiring.

The housing market remains terrible. Natural disasters have disrupted Japan and much of America, along with global trade. Governments at all levels are scaling back, and aggregate demand remains weak across the economy. There’s also some possibility that the U.S. labor market is experiencing structural changes that cloud the employment picture.

One thing hardly any Wall Street analyst is fingering as the cause of the slump: the federal budget deficit, which just happens to be occupying all the economic oxygen in Washington right now.

There’s some sense among economists that relatively strong jobs numbers throughout the spring have obscured the generally slow-go trend of the recovery. One way to frame the weak ADP numbers, PNC economists wrote Wednesday, “is to look to weak GDP growth in 2011Q1 and only-moderate growth in the prior three quarters and ask, ‘Why have employers hired as much as they have through the first four months of 2011?’”

So what will it take for the economy to break out of this slump? “Better than expected job growth,” PNC senior economist Robert Dye wrote in an e-mail. “Stronger wage and nonwage income (in real terms). (An) ongoing rally in equities. Commercial and residential construction reignites. Manufacturing output repatriates and exports boom. Consumer, investor, business confidence heals.”

That’s a dream chain reaction, yes, but at least one spark may already be lit: Gas prices have fallen for three straight weeks.

Lawmakers can help “by not adding more problems to the mix,” said Nigel Gault, chief U.S. economist for IHS Global Insight. “The best thing that they can do is to raise the debt ceiling, thereby removing one potential source of disruption. And they should not try to impose immediate budget austerity on a weak economy.”

Gault, and several other top analysts, expect growth to accelerate in the third quarter. Until then, try not to panic – or get your hopes up too far.

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Katy O'Donnell contributed

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