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Business economists turn pessimistic amid uncertainty

/ Source: contributor

Uncertainty, it seems, is the only certainty these days.

That's the consensus of the latest survey by the National Association for Business Economics in which 86 percent of the economists who responded cited a higher level of uncertainty about the economic recovery.

The results of the group's September study reflect diminished expectations for the economic recovery and a growing pessimism about the near-term health of the housing market, jobs and consumer spending.

This is an about-face for NABE. Earlier surveys conducted in February and again in May both predicted that the economic recovery would strengthen rather than weaken.

In February, NABE forecasters predicted a 3.3 percent growth rate in real GDP for the year. In May, they lowered that to 2.8 percent. Now, they're predicting an anemic 1.7 percent increase, and in their latest report they lowered their expectations for next year's GDP growth rate to 2.3 percent from a previous estimate of 3.2 percent.

While only 3 percent of economists predicted a double-dip recession in May, 13 percent do now. Nearly as many predict that growth will be subpar and inflation will rise.

Myriad reasons are behind the gloomy forecast. Persistently high unemployment is both cause and effect: Even Americans who have jobs worry about job security, which erodes confidence and dampens consumer spending.

"Consumers are worried about their jobs and they don't have as much wealth as they had before," said Martin Baily, a senior fellow at the Brookings Institution. Baily said consumers have scaled back borrowing, either by choice or because the slide in home values has eroded their ability to get credit.

The NABE report lowered its prediction for consumer spending this year to just over 2 percent, down from 2.8 percent in its May survey. Without that consumer demand, companies are reluctant to increase hiring.

NABE respondents don't expect this Catch-22 to resolve itself in the near future. They predict unemployment will remain at 8.7 percent next year.

An inability to borrow caused by tighter lending standards also hurts the real estate market. Although NABE predicted that the housing market would pick back up in its February study, economists now take a more negative view.

The new NABE report says housing starts won't budge from last year, and respondents lowered their forecast for 2012 housing starts by 120,000. They also predict an additional 2 percent drop in home values next year, before the market finally reverses course and ticks back up by 1 percent next year.

One part of the economy where NABE forecasters remain bullish is corporate profits.

"The large corporations have done a terrific of cost-cutting so they're able to make profits even at a reduced level of output," the Brookings Institution's Baily said.

Study respondents predict that corporate profits will increase this year and next by 7 percent annually, and nearly all of the economists surveyed expect the S&P 500 to gain next year by a median of 8 percent.

But while investors may benefit, workers won't, Baily notes, since companies won't commit to hiring without more demand and more spending.