Summer Slowdown: Why the Economic Recovery May Be Stalling

July 1, 2010 — -- The rest of the summer won't necessarily be cruel, but it will at the very least be slow, according to some leading economists. The big gains seen in important measures of economic health like gross domestic product just a few months ago are being replaced by more modest increases, they say.

"I don't expect robust growth," said Douglas Holtz-Eakin, the former director of the Congressional Budget Office who was John McCain's top economics advisor during the 2008 presidential campaign. "This is a slow, steady crawl-out."

Wider acceptance of such a forecast helps explain the drop in the stock markets in recent days, he said.

"They've come to grips with this," he said. "They were overly optimistic before and now they've marked themselves to the reality."

What's prompting the deceleration of the recovery? Here's a breakdown, according to experts:

Inventory: During the worst of the financial crisis, as sales plummeted, businesses cleared their shelves instead of restocking.

"The inventory destocking was making a huge negative contribution to the GDP," said Alan S. Blinder, an economics professor at Princeton University and a former vice chairman of the Federal Reserve.

By late last year, Blinder said, businesses reversed course and began building up their inventories again, leading to a dramatic boost in economic activity. The impact, however, was only temporary and is no longer a major driver in the recovery, he said.

"You can't expect inventory stocking to keep building and building," he said.

Housing: The federal tax credit for home buyers helped bolster the long-ailing housing market, but now that it's ending -- the government extended the deadline for the credit Wednesday, but only for buyers who have already signed purchase agreements -- housing sales are hitting the doldrums once again. A report released today by the National Association of Realtors said that purchase contracts signed in May dropped to a record low.

Critics say that the home buyer credit, instead of providing a sustained benefit to economic growth, just encouraged would-be buyers to make their purchases sooner rather than later.

"You pulled forward (home sale) activity," said Citigroup U.S. economist Steven Wieting. "Consequently, now there's a larger decline in sales."