U.S. Economy: Growth Trails Forecasts as Consumers Retrench

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Slower job and income gains raise the risk that a pickup in purchases during the remainder of 2011 will fail to materialize. Close

Slower job and income gains raise the risk that a pickup in purchases during the... Read More

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Photographer: Kevork Djansezian/Getty Images

Slower job and income gains raise the risk that a pickup in purchases during the remainder of 2011 will fail to materialize.

The U.S. economy grew less than forecast in the second quarter, after almost stalling at the start of the year, as consumers retrenched.

Gross domestic product climbed at a 1.3 percent annual rate following a 0.4 percent gain in the prior quarter that was less than earlier estimated, Commerce Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 1.8 percent increase. Household purchases, about 70 percent of the economy, rose 0.1 percent.

Stocks fell as the report dimmed prospects for faster growth in the rest of 2011. The faltering economy may get another blow from spending cuts being negotiated in Congress, keeping pressure on Federal Reserve Chairman Ben S. Bernanke to hold interest rates near zero.

“The second-half rebound is melting away,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, the only forecaster polled to correctly estimate the gain in GDP. “It’s a very, very difficult situation for policy makers. The Fed could give a pretty strong signal that they are not likely to move on interest rates for a very long time.”

Stocks pared declines and Treasuries rallied on speculation lawmakers will reach a compromise on raising the debt ceiling, averting a government default. The Standard & Poor’s 500 Index slid 0.7 percent to 1,292.28 at the 4 p.m. close of trading in New York after dropping as much as 1.4 percent. The yield on the 10-year Treasury note fell 16 basis points to 2.79 percent, the lowest since November.

Consumer Sentiment

Other reports today showed consumer and business sentiment cooled in July, indicating the economy isn’t gaining momentum as the second half begins.

The Institute for Supply Management-Chicago Inc. said its business barometer fell to 58.8 in July from 61.1 the prior month. Figures greater than 50 signal expansion.

The Thomson Reuters/University of Michigan final index of consumer sentiment fell to 63.7 this month, the weakest since March 2009, from 71.5 in June.

Consumer spending from April through June showed the smallest gain since the second quarter of 2009, when the economy was in recession, the Commerce Department report showed. The slump reflected a 4.4 percent plunge in purchases of durable goods like automobiles.

Gasoline Prices

Higher expenses for necessities like food and energy may have curtailed spending on less essential items. The cost of a gallon of regular gasoline climbed in May to about $4 a gallon, the highest in almost three years, according to AAA, the nation’s biggest auto group.

Purchase, New York-based PepsiCo Inc., the world’s largest snack-food maker, said profit this year will increase more slowly than it previously projected because of rising commodity costs and cooling customer demand.

“It’s the consumer and competitive picture that has become more difficult than we expected,” Chief Executive Officer Indra Nooyi said on a July 21 conference call.

The unemployment rate climbed to 9.2 percent in June while payrolls grew by 18,000, the fewest in nine months, Labor Department figures showed on July 8.

“You’re going to need more employment to really get the consumer comfortable with increasing their spending,” said Michael Carey, chief economist for North America at Credit Agricole CIB in New York. “We’re going to need more employment as well for businesses to really become confident that demand is going to be there.”

Pre-Recession Peak

Economic growth in the first quarter was revised down from a 1.9 percent prior estimate, reflecting fewer inventories and more imports, the Commerce Department’s report showed. At $13.27 trillion in the second quarter, GDP has yet to surpass the pre- recession peak.

Revisions to GDP figures going back to 2003 showed that the 2007-2009 recession took a bigger bite out of the economy than previously estimated, and the recovery lost momentum throughout 2010. The world’s largest economy shrank 5.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the previously reported 4.1 percent drop.

Federal Reserve Bank of Atlanta President Dennis Lockhart said he favors maintaining record monetary stimulus and doesn’t see the need for a third round of asset purchases to stimulate growth.

“We keep policy where it is,” Lockhart said today in a Bloomberg Television interview in Jackson Hole, Wyoming. “It is highly accommodative.”

‘High Bar’

“I don’t think you want to take any policy option off the table,” he said. At the same time, “There is a high bar to do another round of quantitative easing.”

The policy-setting Federal Open Market Committee next meets Aug. 9. At their last meeting in June, central bankers decided to keep the Fed’s balance sheet at a record to spur the recovery after completing $600 billion of bond purchases. They also repeated their vow to keep interest rates near zero for an “extended period.”

“In the very near term, the recovery is rather fragile,” Fed Chairman Bernanke told lawmakers on July 14. “We just want to make sure that we have the options when they become necessary” to stimulate the economy.

The employment outlook remains dim, based on company announcements this month. San Jose, California-based Cisco Systems Inc. (CSCO), the world’s largest networking-equipment maker, plans to cut about 6,500 jobs worldwide. Goldman Sachs Group Inc. will reduce staff by about 1,000, and Lockheed Martin Corp. (LMT) will offer a voluntary separation plan to 6,500 employees.

‘Still Struggling’

“Recent economic data are clear -- the U.S. economy is still struggling to emerge from the Great Recession and unable to move to a path of vibrant and sustainable growth,” Dan DiMicco, chairman and chief executive officer at steelmaker Nucor Corp., said on a July 21 teleconference with analysts.

The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed at a 2.1 percent pace, the most since the last three months of 2009, compared with 1.6 percent in the first quarter, as higher oil and food costs pushed up prices of other goods and services. The central bank’s longer-term projection is a range of 1.7 percent to 2 percent.

“This is the worst of all worlds for investors, certainly the worst of all worlds for the Fed,” John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said in an interview on Bloomberg Television. “A little too much inflation, not enough growth, that is a tough scenario in the U.S.”

Business Investment

Much of the growth in the second quarter came from business investment and trade. Spending on commercial structures, including factories and office building, and equipment contributed 0.6 percentage point to growth. The improvement in the difference between imports and exports added another 0.6 point.

Overseas sales will remain a backstop for factories. Dow Chemical Co. (DOW), the largest U.S. chemical maker, said demand is “strong” in markets abroad.

“We captured strong growth in Latin America, and the emerging geographies more broadly, while North America experienced moderate growth,” Andrew Liveris, chief executive officer, said on a July 27 conference call with analysts.

Inventories grew in the second quarter at about the same pace as in the prior three months, adding 0.2 percentage point to GDP.

Government Spending

A slump in government spending added to the economy’s woes last quarter. Outlays by state and local agencies dropped at a 3.4 percent annual pace, and non-military spending by the federal government fell 7.3 percent, the most since 2006.

One area of weakness last quarter was auto purchases. Cars and light trucks sold at an average 12.1 annual rate in the April to June period, down from a 13 million pace in the first three months of the year, according to industry data.

A shortage of Japanese-made parts after the earthquake and tsunami in March slowed production at U.S. manufacturers. The shortage of components is projected to ease this quarter.

At the same time, the government’s inability to agree on a budget and debt-limit increase may be making companies reluctant to order new equipment and hire in the second half.

Today’s GDP estimate is the first of three for the quarter, with the other releases scheduled for August and September when more information becomes available.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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