The shockingly bad employment report for June, combined with other weaker than expected indicators, calls into question the viability of the recovery. However, while the economy has clearly lost considerable momentum and is more fragile than had been thought, we continue to expect better growth in the second half of this year and beyond.
GDP is now forecast to grow less than 2% in Q2 and about 2.7% in the second half. On an annual basis, GDP is forecast to expand 2.3% this year and 2.8% in 2012, down from 2.5% and 2.9% in our last forecast.
QE2 has come to an end. If economic prospects worsen further, the Federal Reserve could implement a new round of easing, but that appears unlikely at present. The federal debt ceiling battle is coming down to the wire. We continue to expect an increase in the ceiling before the early August deadline, but it may be implemented without a significant cut in the deficit.