US Economy Goes From 'Hero to Zero'

Monday’s weak US retail sales showed that the world’s biggest economy is slowing very quickly, leading one economist to claim America has gone from “first half hero to second quarter zero.”

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The 0.5 percent fall for June was far worse than expected and the third monthly drop, the longest run of falling sales since 2008 when the Lehman crisis led America into recession.

“Given how rapid the slowdown in job growth has been, it is hard to blame consumers for their increased caution,” said Capital Economics chief U.S. economist Paul Ashworth.

Arguing that the data showed just how quickly the U.S. recovery has gone “from first-quarter hero to second-quarter zero.” Ashworth believes the slowdown echoes what we saw in the second quarter of 2010.

That slowdown ultimately led the Federal Reserveto launch a second round of quantitative easing later that year, but Ashworth believes Federal Reserve Chairman Ben Bernanke will need more evidence before pulling the trigger on another round of easing.

“The bar to QE3 is higher than for QE2, if only because there is considerable skepticism that balance sheet expansion will accomplish much,” said Ashworth.

Others agree that the data is not surprising given the weak jobs data.

“This softness coincides with a slower momentum in payrolls in recent months which has dampened growth in labor income,” said Dr Christoph Balz, a senior economist at Commerzbank in a research note.

Balz believes the data is even more sobering given the steep fall in gasoline prices, something which should have put more money in consumer’s pockets over recent months.

In “the second quarter as a whole, consumers probably spent just 1.0 percent more than in the first quarter, a sharp slowdown from the 2.5 percent expansion in the previous quarter,” said Balz, who notes that with consumption making up 70 percent of U.S. GDP, second quarter growth data is likely to be very weak.

Others believe the weak retail data could prove a tipping point for the Fed.

“For all the concern about the recovery stalling at this time last year, underlying retail sales growth actually held up quite well,” said Steven Englander, the global head of G10 FX strategy at CitiFX on Monday.

“While we would normally caution against reading too much into any single data release, June's retail sales may be the one that proves to be the tipping point that persuades the Fed to launch a third round of quantitative easing” said Englander.