Moody’s Zandi sees QE3 on horizon

As economic and political conditions continue to deteriorate, Moody’s Analytics lowered its estimate on GDP growth to about 2% for the second half of 2011. Mark Zandi, chief economist at Moody’s Analytics, said the economy isn’t adding enough jobs to keep the unemployment rate stable, and he expects 1 million fewer jobs created though 2012 than previously projected. “The odds of a renewed recession over the next 12 months, already one in three, will increase if stock prices continue to fall,” Zandi said. “While it remains likely that the recovery will continue, the near-term economic outlook is significantly weaker than it was just a month ago.” At the start of 2011, the economic recovery “appeared healthy and ready to become self-sustaining,” according to Moody’s Analytics, as job growth improved, unemployment fell, and income and consumer spending accelerated. But climbing gasoline and food prices and fallout from the Japanese earthquake in the spring coupled with the debt-ceiling issues, the Standard & Poor’s downgrade of the country’s debt rating and the renewed European debt crisis of late undermined business, consumer and investor confidence, Moody’s said. “The U.S. economy has suffered an extraordinary reversal of fortune,” Zandi said. All this prompted Zandi to lower estimates on GDP growth. Moody’s Analytics previously expected growth of 3.5% in the final six months of 2011 and through 2012. He said consumer confidence is crippled and corporate America is grappling with the influx of new regulation. “Sentiment can be so harmed that businesses, consumers and investors freeze up, turning a gloomy outlook into a self-fulfilling prophecy. This is one of those times,” Zandi said. And with the huge loss of wealth in equity markets over the past few months, “a loss of faith in the economy can quickly become self-fulfilling.” Zandi said every $1 decline in stock wealth reduces consumer spending by 3 cents and the losses of 2011 project to spending taking a $100 billion hit in the coming year, subsequently lowering GDP growth by two-thirds of a percentage point. He said the Federal Reserve decision to maintain near-zero interest rates through the middle of 2013 helps bring down long-term interest rates and should spur increased investment. “It was a bolder step than investors had expected, and it significantly lowers the bar for another round of quantitative easing,” according to Zandi. “It now seems more likely than not that QE3 will begin in the next couple of months.” Write to Jason Philyaw. Follow him on Twitter: @jrphilyaw