Experts' fiscal outlook darkens

The chances of the economy slipping into another recession have risen significantly, and forecasts for economic growth and job gains over the next year have been substantially downsized, according to USA TODAY's quarterly survey of top economists.

The 39 economists polled Aug. 3-11 put the chance of another downturn at 30% -- twice as high as three months ago, according to their median estimates. That means another shock to the fragile economy -- such as more stock market declines or a worsening of the European debt crisis -- could push the nation over the edge.

Yet even if the USA avoids a recession, as economists still expect, they see economic growth muddling along at about 2.5% the next year, down from 3.1% in April's survey. The economy must grow well above 3% to significantly cut unemployment.

As a result, the economists predict the jobless rate will fall painfully slowly, dipping to 8.8% in 12 months, not much below today's 9.1%. In April, they estimated unemployment would be 8.2% by mid-2012.

"We'll continue on a path of pretty slow and disappointing growth, but probably there's not a decline into recession," says Robert Mellman, senior economist for JPMorgan Chase.

The gloomier forecast is a stunning reversal. Just weeks ago, economists were calling for a strong rebound in the second half of the year, based on falling gasoline prices giving consumers more to spend on other things and car sales taking off as auto supply disruptions after Japan's earthquake faded. In fact, July retail sales showed their best gain in four months.

That was before European debt woes spread, the government cut its growth estimates for the first half of 2011 to less than 1%, and Standard & Poor's lowered the USA's credit rating after the showdown over the debt ceiling.

U.S. consumer confidence in early August sank to its lowest since 1980, according to the Thomson Reuters/University of Michigan survey released Friday.

Mellman says the biggest threat to the recovery is the stock market moving lower or sideways the next few months, weakening already-sluggish consumer spending. Paul Kasriel, chief economist of Northern Trust, worries more about falling U.S. exports -- one of the economy's few bright spots -- as growth in China slows.

Mark Zandi, chief economist of Moody's Analytics, is more sanguine. The fundamentals of the U.S economy are strong, he says, noting that companies, consumers and banks have all improved their balance sheets and that corporations are sitting on record cash reserves. The main problem, he says, is "a crisis of confidence."

To solve it, Zandi expects the Federal Reserve to buy more Treasury bonds to lower interest rates and drive investments to stocks. Almost a third of the economists surveyed expect the Fed to begin another stimulus in the next six months.