Growth in U.S. Probably Cooled as Spending Slowed, Trade Deficit Swelled
The U.S. economy expanded at a slower pace in the second quarter as consumer spending cooled and the trade deficit swelled, economists project a report this week will show.
Gross domestic product rose at a 2.5 percent annual pace after increasing at a 2.7 percent rate in the first three months of the year, according to the median estimate of 68 economists surveyed by Bloomberg News before a July 30 Commerce Department report. Other data may show gains in business investment are taking up some of the slack, while housing is mired in a slump.
Less growth heading into the second half of the year means employers will hesitate to take on staff and will keep a lid on prices to spur sales. Federal Reserve Chairman Ben S. Bernanke last week said the central bank is prepared to take further policy actions if the world’s largest economy “doesn’t continue to improve.”
“We’re experiencing a relatively subdued and fragile recovery,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston. “That fits with subdued payroll growth and subdued inflation going forward.”
The GDP estimate is the first of three for the quarter, with the other releases scheduled in August and September when more information becomes available.
Consumer spending, which accounts for about 70 percent of the economy, increased at a 2.4 percent annual rate last quarter after growing at a 3 percent pace the previous three months, economists project the report will show.
Spending Outlook
A lack of jobs, a loss of household wealth stemming from the slumps in stocks and housing, tight credit and the need to reduce debt and rebuild savings are among reasons economists forecast spending will be slow to recover. Purchases will increase at a 2.6 percent pace on average in the second half of the year, according to the median estimate of economists surveyed earlier this month.
Company payrolls rose by 83,000 in June, while overall the economy lost 125,000 jobs, the Labor Department reported July 2. The unemployment rate fell to 9.5 percent as discouraged workers dropped out of the labor force.
A widening trade gap and a slower pace of inventory restocking also depressed growth last quarter, economists said. Stockpiles climbed 0.1 percent in May, the smallest gain this year, according to Commerce Department data.
Imports Climb
The trade deficit adjusted for inflation, the figures used in calculating GDP, averaged $45.1 billion a month in April and May, up from $42.3 billion a month in the first quarter as imports climbed faster than exports, according to figures from the Commerce Department.
The government will estimate June figures for trade and inventories, which will not be available until next month, in calculating growth.
Business investment is one area charging ahead. Spending on equipment and software contributed 0.7 percentage point to growth in the first three months of the year.
A report from the Commerce Department on July 28 will show orders for goods meant to last at least three years increased 1 percent in June, the sixth gain in seven months, according to the survey median.
The recent surge in imports reflects in part the increases in U.S. business investment on new equipment. United Parcel Service Inc., the world’s largest package-delivery company, raised its annual profit forecast last week after net income last quarter jumped 90 percent from the same period in 2009.
Economic Bellwether
Domestic shipments will continue to grow roughly in line with U.S. gross domestic product, and exports from Europe and Asia will continue to improve, even if the pace “moderates” somewhat in the second half of this year, UPS executives said. UPS and FedEx Corp. are considered economic bellwethers because they deliver goods ranging from clothing to pharmaceuticals and industrial parts.
“Despite the anticipated slow pace of the U.S. recovery and a cautious outlook for Europe, we are confident in our ability to grow the business and improve profits,” Chief Financial Officer Kurt Kuehn said in a July 22 statement.
The Standard & Poor’s 500 Index has dropped 5.7 percent since the end of the first quarter on concerns that the European debt crisis will curb global growth. The index climbed 0.8 percent to 1,102.66 at the 4 p.m. close on July 23, its first gain above 1,100 in a month.
One industry likely to weigh on growth in the coming months is housing. Sales of new homes rose to a 311,000 annual pace in June, second to May’s 300,000 rate as the lowest on record, the survey median showed ahead of a report tomorrow from the Commerce Department. Purchases plunged an unprecedented 33 percent in May after a tax credit expired on April 30.
Confidence measures will show Americans grew more pessimistic this month about the economy. The Reuters/University of Michigan index of consumer sentiment, due July 30, dropped to 67 from 76 in June, according to the survey median. The Conference Board’s consumer confidence gauge dropped to 51 from 52.9, the survey showed ahead of the July 27 report.
Bloomberg Survey
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Release Period Prior Median
Indicator Date Value Forecast
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New Home Sales ,000’s 7/26 June 300 311
New Home Sales MOM% 7/26 June -32.7% 3.7%
Case Shiller Monthly MO 7/27 May 0.4% 0.2%
Case Shiller Monthly YO 7/27 May 3.8% 3.9%
Case Shiller Monthly In 7/27 May 144.6 145.3
Consumer Conf Index 7/27 July 52.9 51.0
Durables Orders MOM% 7/28 June -0.6% 1.0%
Durables Ex-Trans MOM% 7/28 June 1.6% 0.4%
Initial Claims ,000’s 7/29 24-Jul 464 460
Cont. Claims ,000’s 7/29 17-Jul 4487 4500
GDP Annual QOQ% 7/30 1Q A 2.7% 2.5%
Personal Consump. QOQ% 7/30 1Q A 3.0% 2.4%
GDP Prices QOQ% 7/30 1Q A 1.1% 1.1%
Core PCE Prices QOQ% 7/30 1Q A 0.7% 1.0%
Employ Costs QOQ% 7/30 2Q 0.6% 0.5%
Chicago PM Index 7/30 July 59.1 56.0
U of Mich Conf. Index 7/30 July F 66.5 67.0
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source: bloomberg.com
