The U.S. economic recovery is faltering, and Washington is running out of ways to get it back on track.
New reports Wednesday showed a steep slowdown in the manufacturing sector and weak private-sector job creation in May. The grim news comes on the heels of other recent indicators -- falling home prices and consumer spending -- that reflect an economy slowing to a limp this spring.
The data dash the sunnier expectations that many analysts had entering the year; many forecasters had expected economic growth of 3.5 to 4 percent in 2011.
Instead, the U.S. economy appears to be settling back into a pattern of growth near its long-term trend rate of 2.5 to 3 percent. That rate of growth is enough only to accommodate a rising population and higher worker productivity, not to put the millions of jobless back to work -- keeping unemployment mostly stuck at its current rate.
"The recovery continues but at a disturbingly slow pace," said Diane Swonk, chief economist for Mesirow Financial.
While the stock market has held up in recent weeks, the market for U.S. government bonds is reflecting the diminished economic prospects. The interest rate the Treasury must pay to borrow money for 10 years fell to 2.95 percent Wednesday, from 3.06 percent on Tuesday and 3.74 percent in February. Investors have favored the safety of government bonds, anticipating that the Federal Reserve will keep interests rates low for longer than previously expected.
The stock market was down 2.3 percent Wednesday as measured by the Standard & Poor's 500-stock index, reflecting the weak economic news.
When economic growth slowed last summer and analysts began to fear a dip back into recession, the government swung into action. The Federal Reserve began discussing what would become known as "QE2," or the second round of quantitative easing -- a $600 billion effort to prop up growth that ends this month. Congress and the Obama administration also reached an accord by the end of 2010 to temporarily cut payroll taxes to boost consumer spending.
Away from federal spending
But there is little reason to believe the government will use those policy tools for the current situation. The Fed used monetary easing out of fear that inflation was too low, raising the risk of deflation, or falling prices. The bond market is now pricing in inflation of just under 2 percent a year over the coming five years, exactly the level the Fed aims for.
As they struggle to reduce the bulging budget deficit, Congress and the president have turned their attention away from the federal spending and tax breaks they used to stimulate growth in the near term.
May showed the slowest rate of expansion in the nation's factories since September 2009. The Institute for Supply Management said Wednesday that its index of manufacturing activity fell to 53.5 in May from 60.4 in April.
Numbers above 50 indicate expansion, and analysts had expected a more modest pullback to 57.1. New orders and production fell the lowest, likely triggered by disruptions in automobile and other production after the March earthquake and tsunami in Japan, which has hurt supply chains around the world.
"Earlier in its recovery, manufacturing had the wind at its back from a very pronounced rebuilding of inventories," said Cliff Waldman, economist at the Manufacturers Alliance/MAPI, a trade group. "At this point, however, elevated commodity prices, slowing global growth and an increasingly questionable outlook for the U.S. economy are creating head winds for the factory sector, which thus far has been the one strong element in an otherwise sluggish U.S. economic rebound."
Other negative signs
Also Wednesday, ADP, the payroll processing company, said the rate of job creation at private businesses slowed sharply last month. Firms added only 38,000 jobs, ADP estimated, compared with 179,000 jobs added in April.
While the ADP survey is inconsistent in predicting overall job growth according to official government numbers, the May report matches other negative signs about the job market. The number of people filing new claims for unemployment insurance benefits has drifted up in recent weeks.
On Friday, another set of numbers will add to the national economic picture. The Labor Department will release its report on May job growth and the unemployment rate. Economists expect that about 180,000 new jobs were created last month, dropping from 244,000 in April, and that the unemployment rate has edged down to 8.9 percent from 9 percent.