U.S. economy: Not looking so good

June 16, 2014: 12:45 PM ET
slow economy
NEW YORK (CNNMoney)

When it comes to the U.S. economy, the glass just went from half full to half empty.

At the start of the year, economists were optimistic. Perhaps the economy would grow 3% this year, they said, instead of the measly 2% pace it's been stuck at for the prior three years.

So much for that hopeful thinking. Half-way through the year, forecasts are being slashed. The latest Zorro move comes from the International Monetary Fund. The organization said Monday that the U.S. economy would only grow 2% this year, down from it earlier forecast of 2.8%.

This comes on the heels of the World Bank announcement last week that it was cutting its prediction for the United States and the broader world economy. Many expect Federal Reserve policymakers to do the same downward revision when they meet this week.

Related: All eyes on the Fed this week

What went wrong?

Blame it on the deep freeze that caused a very weak start to 2014.

"In the early part of the year, as a harsh winter conspired with other factors... momentum faded in the U.S economy," the IMF said. Even though the economy is now starting to bounce back, the IMF doesn't believe the comeback will be strong enough to completely offset the terrible first quarter.

I worked in finance. Now I'm a nurse

Here's how bad the first quarter was: The data already show the economy contracted in the first quarter, but now it looks like that contraction was the deepest decline since the Great Recession. The housing market slowed, businesses invested less money in new equipment and buildings, and exports of American goods declined.

Related: The U.S. economy shrank in the first quarter. Is it a big deal?

Economists still believe the first quarter downturn is a one-time blip, caused mostly by brutal winter. Snowstorms put new home construction on hold, slowed shipments of goods, and dissuaded people from going out to car lots to buy new cars.

The one bright spot supposedly came from consumers spending more of their money, particularly on services like health care. With Obamacare coming into effect, the Commerce Department assumed health care spending rose dramatically in the first quarter. Now, it looks like that assumption was flawed.

Related: 6 things that worry Dr. Doom about the economy

A Census report released Friday shows health care spending was far weaker than expected in the first quarter. As a result, economists are now forecasting the economy contracted at an annual rate of 1.5% to 2.4% in the first three months of the year, even weaker than the 1% contraction already reported by the Commerce Department. (The Commerce Department will revise its GDP numbers next week).

If that's the case, achieving 3% growth for 2014 overall will be next to impossible. The economy would have to grow at around a 4.6% annual pace for the next three quarters in a row.

The United States has not had a growth spurt that strong since late 2003 to early 2004.

Growth in 2015 and beyond: If there's a silver lining in the latest downgrades of U.S. economic growth for 2014, it's that many are still forecasting a pickup in 2015.

The IMF predicts the U.S. will grow 3% in 2015. But the report is also quick to point out problems that will put a drag on the U.S. economy in the coming years such as population aging and "modest prospects for productivity growth."

To boost output, the IMF urges the U.S. to undertake a "skills-based approach" to immigration reform and to lift restrictions on U.S. oil exports.

Join the Conversation
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.08%4.24%
15 yr fixed3.19%3.23%
5/1 ARM3.36%3.46%
30 yr refi4.06%4.15%
15 yr refi3.17%3.17%
View rates in your area
 
Find personalized rates:
Rate data provided
by Bankrate.com
Search for Jobs