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Consumer spending wanes and growth slows Original Source Link: (May no longer be active)
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U.S. Economy: 2nd-Qtr Growth Slows as Consumer Spending Wanes
July 30 (Bloomberg) -- The U.S. economy grew at a 3 percent annual rate from April through June, the slowest rate in more than a year, as rising energy prices led to the weakest pace of consumer spending since the 2001 recession.
The change in gross domestic product, the value of all goods and services produced, followed a 4.5 percent rate in the first quarter that was faster than the previously reported 3.9 percent, the Commerce Department said. U.S. Treasury notes rose.
Consumer spending slowed to a 1 percent annual rate after a 4.1 percent gain in the first three months. Gasoline prices above $2 a gallon crimped sales at retailers such as Wal-Mart Stores Inc. Consumer confidence and Chicago-area manufacturing rose this month, signs the economy may emerge from what Federal Reserve Chairman Alan Greenspan called a ``soft patch'' in June.
``The consumer got hit with higher energy bills and that is why we aren't pessimistic about the future,'' said James Glassman, senior economist at J.P. Morgan Securities in New York, which correctly forecast GDP. ``Things are coming alive on the business side -- the baton is being passed from the consumer to the business sector and that makes for more balanced growth.''
An index of Chicago-area manufacturers and other businesses rebounded this month because of more orders, production and a rise in backlogs. The National Association of Purchasing Management- Chicago's regional index rose to 64.7 from a June reading of 56.4. Readings greater than 50 signal growth.
U.S. consumer confidence increased for a second straight month in July amid a rebound in hiring. The University of Michigan's final index of consumer sentiment for this month rose to 96.7, the highest since January, from 95.6 in June. The back-to- back increases were the first since October-November 2003.
`Coming in Higher'
``June was a bad retail month for a lot of people,'' said Steve Reinemund, PepsiCo Inc. chief executive officer, in an interview in Plano, Texas. ``The numbers for July seem to be coming in higher. I don't think Wal-Mart or the retail sector in general is on a downward trend.''
Economists had predicted that GDP would rise 3.7 percent, based on the median of 73 estimates in a Bloomberg News survey. The 1 percent annual rate for consumer spending was half the median forecast.
The Treasury's 4 3/4 percent note maturing in May 2014 rose 17/32 point, pushing down the yield 7 basis points to 4.51 percent at 10:46 a.m. New York time.
The growth rate in the second quarter was the weakest since a 1.9 percent pace in the first three months of last year. Spending increased by the least since the second quarter of 2001, when the U.S. was entering an eight-month recession.
The GDP price deflator used to adjust the figures rose at a 3.2 percent annual rate, the most since the 2001 first quarter. The price deflator accelerated in the second quarter after rising at a 2.7 percent annual pace in the previous three months.
Inflation Measure
Excluding energy and food, a measure of inflation tied to consumer spending slowed. The core personal consumption expenditures index, watched by Federal Reserve policy makers, rose 1.8 percent at an annual rate in the second quarter after a 2.1 percent pace. The measure is now within the central bankers' forecast of 1.5 percent to 2 percent for the year.
Adjusted for inflation, GDP totaled $10.8 trillion at an annual rate. Unadjusted for the change in prices, it totaled $11.6 trillion, rising at a 6.3 percent annual rate after a 7.4 percent pace in the first quarter.
``Nominal demand growth, as represented by nominal GDP, remains very robust and this report should in no way discourage the Fed from raising rates a quarter point on Aug. 10,'' said John Ryding, Bear Stearns & Co.'s chief economist, in a report. ``We continue to stick to our view that the Fed will raise rates three more times this year, putting the funds rate at 2 percent by yearend.''
Inventories
Inventories grew $47.5 billion at an annual rate, compared with a revised $40 billion rise in the first quarter. Inventories added 0.28 percentage point to second-quarter growth, compared with 1.17 percent in the first quarter.
Business fixed investment, which includes spending on commercial construction as well as equipment and software, grew at an 8.9 percent annual rate in the second quarter, compared with a 4.2 percent pace in the first quarter. Spending on software and equipment rose 10 percent, compared with a rise of 8 percent in the first quarter.
``The equipment and software numbers show that businesses are stepping up to the plate,'' said William Zadrozny, president and chief executive officer of Siemens Financial Services, the Iselin, New Jersey lending unit of Siemens AG. ``Everyone we talk to says business is good. It's not great, but it's good, and that's a big change from a year or so ago, when everyone would say that business was only okay.''
Investment in plants, buildings and other structures rose at a 5.2 percent annual rate after falling 7.6 percent pace.
The trade deficit deteriorated in the second quarter to a gap of $552.8 billion from $550.1 billion in the first three months of the year.
Government spending increased 2.3 percent annual pace in the second quarter compared with a rise of 2.5 percent January through March.
Today's report contains the governments' annual revisions for the GDP statistics based on more complete information derived from government surveys and data from the Internal Revenue Service that is only available with a lag.
Revisions
The revisions cover all figures starting with the first quarter of 2001. The eight-month U.S. recession that ended in November 2001 was the shallowest on record and the subsequent recovery was also milder, the revised figures show. The economy grew 3 percent last year rather than the 3.1 percent estimated previously. It expanded 1.9 percent in 2002 and 0.8 percent in 2001. Previously, growth for 2002 and 2001 was estimated at 2.2 percent and 0.5 percent, respectively.
The economy has been a major issue in the presidential campaign, as Democrats criticize President George W. Bush for a net loss of 1.1 million jobs during his term. Bush has argued the economy has finally overcome the Sept. 11 attacks, corporate scandals, and an inherited recession, creating 1.3 million jobs so far this year.
FactCheck.org, an arm of the Annenberg Public Policy Center of the University of Pennsylvania, on July 9 said employment ``has recently increased by more than 1 million (jobs) in categories that on average paid above the median earnings'' of $541 a week. ``By that measure, the jobs gained are overwhelmingly good jobs, the very opposite of the claim made by Kerry and his allies.''
Fuel
Consumer confidence has been restrained by higher fuel costs. Crude oil futures on the New York Mercantile Exchange rose Wednesday to a record $43.05 a barrel after OAO Yukos Oil Co., Russia's biggest oil exporter, said the government ordered a halt to production from its main Siberian unit.
``High oil prices have already put a dent in global growth and there is a substantial risk of either a further rise in oil prices or an extended period of high oil prices,'' said Nariman Behravesh, chief global economist of Global Insight, a forecasting and consulting firm, in a note to clients.
The average retail price of all grades of gasoline rose to a record $2.10 a gallon on May 24 and held above $2 in June, according to Department of Energy figures. Gasoline prices this month have fallen to an average of $1.95 a gallon.
A flurry of economic reports this month suggested a slowdown at the end of the second quarter. June payrolls increased 112,000, or less than half the gain of the previous month. Other statistics showed retail and auto sales fell and industrial production declined for the first time since March.
`Challenging'
``It was a challenging quarter,'' said Gary Bloom, chief executive at Veritas Software Corp., the world's second-biggest maker of data-storage software in an interview Wednesday. ``It feels like spending patterns slowed down a little bit. We're still optimistic about the year.''
Ethan Allen Interiors Inc., which sells furniture at more than 300 stores, said profit in the fiscal fourth-quarter ended June 30 declined 34 percent as it closed plants and demand for the company's home furnishings fell.
``The economy is improving, however, it is somewhat spotty, it goes up in spurts,'' said Farooq Kathwari, chief executive of the Danbury, Connecticut-based company, in an interview yesterday. ``We have to be somewhat conservative.''
Greenspan and other U.S. central bank officials said last week that the economy will shake off recent ``softness'' and resume a robust expansion.
``I feel very bullish about the economy,'' said Clayton Jones, chief executive of Rockwell Collins Inc., which makes cockpit instruments for Boeing Co. 737s and F-15 fighters. ``I think it's good and getting better,'' he said in an interview Tuesday.
Global Growth
Parker Hannifin Corp., the world's largest maker of hydraulic equipment, said sales in the fourth-quarter ended June 30 jumped 20 percent on demand for products such as valves and pumps for industrial machinery.
``The global economic recovery that began in the second half of 2003 appears to be firmly established,'' J. Pedro Reinhard, chief financial officer at Dow Chemical Co., the biggest U.S. chemical maker, said yesterday.
Dow sales gained 19 percent in the three months through June.
The economy is forecast to grow 4.5 percent this year, the fastest since 1999, based on the median estimate of economists polled by Bloomberg News June 25 to July 6.
Rockwell Collins, based in Cedar Rapids, Iowa, is adding engineering jobs because of an improving aviation industry, Jones said.
The economy had added 1.3 million jobs this year and may create about a quarter million more in July, according to the median of economists surveyed by Bloomberg News. That may help bolster consumer spending, which economists surveyed by Bloomberg forecast to climb to 3.5 percent in the third quarter.
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