Consumers Spur Growth in U.S. as Exports Decline

The U.S. economy is being thrown back on its own devices as sputtering global growth blunts America’s efforts to use exports to help power its expansion even as the value of the dollar hovers near a record low.

Exports fell last quarter for the first time in 3-1/2 years, according to Commerce Department figures released on Oct. 26, clipping growth by almost a quarter percentage point. The shortfall was made up by increased consumer spending, higher government outlays and gains in residential construction. Gross domestic product climbed at an annual rate of 2 percent in the third quarter after rising 1.3 percent in the second.

The shift to domestic drivers of the expansion comes at an opportune moment and may be a harbinger of better times in 2013, especially if the rest of the world rebounds and the U.S. avoids the so-called fiscal cliff of higher taxes and lower government spending.

“The improvement in the domestic engines of growth will allow us to muddle through the worries on the European side and the Asian side and probably pick up pace next year,” said Joseph Carson, director of global economic research for AllianceBernstein in New York. He sees the economy expanding 2.8 percent in 2013 after rising 2.2 percent this year.

Most U.S. stocks retreated on Oct. 26 as investors watched economic and corporate earnings reports. The Standard & Poor’s 500 Index decreased 0.1 percent to 1,411.94 as the benchmark measure extended its weekly decline to 1.5 percent. Equity trading was cancelled in the U.S. today as Hurricane Sandy barreled toward New York City.

Incomes Grow

Consumer spending climbed more than forecast in September as incomes grew, a sign the biggest part of the economy was picking up as the quarter drew to a close, according to Commerce Department figures released today.

Household purchases, which account for about 70 percent of the economy, rose 0.8 percent, the most since February, after a 0.5 percent gain the prior month. The median estimate in a Bloomberg survey of 71 economists called for a 0.6 percent rise. Incomes rose 0.4 percent, the most since March.

The pattern of growth so far in the three-year U.S. recovery has been different than in the past, Carson said. Housing and consumption, especially automobile demand, traditionally lead the U.S. out of recessions as low interest rates entice Americans into buying. That didn’t happen this time because consumers were weighed down by debt and the housing market was depressed.

China Rebound

Instead, exports and business investment, which usually lag, powered growth early on, as manufacturers in particular benefitted from a rapid economic rebound in China and other emerging-market nations.

Now the drivers of the economy are shifting. Consumers have reduced their debts -- household liabilities as a share of income are at their lowest point since 2003, according to Federal Reserve data -- and are stepping up spending.

Vehicle sales rose last month to a seasonally adjusted annualized rate of 14.9 million, the highest since March 2008, from 14.5 million in August, according to researcher Autodata Corp. in Woodcliff Lake, New Jersey.

Housing also is picking up. Americans bought new homes in September at the fastest pace in two years as sales climbed 5.7 percent, Commerce Department data showed last week.

“We’re seeing strength in areas that have been lagging,” said Scott Anderson, chief economist at Bank of the West in San Francisco, who correctly forecast third-quarter growth.

Europe Slump

Meanwhile, a slump in Europe and slower growth in China is curbing foreign purchases of U.S. products. The trade deficit widened 4.1 percent in August as exports fell to the lowest level since February.

Weakness in the dollar didn’t prevent the 1.6 percent decline in U.S. exports last quarter. The price-adjusted broad dollar index compiled monthly by the Federal Reserve has fallen by about a quarter over the past decade to 83.79 in September, 4 percent above its record low set in July of last year.

“Exchange-rate values have surprisingly little impact on trade data,” said Mike Englund, chief economist of Action Economics in Boulder, Colorado.

The global slowdown, along with concern about the fiscal cliff -- more than $600 billion in government spending cuts and tax increases that will kick in at the start of 2013 under current legislation -- is prompting companies to cut back on capital expenditures, Anderson added.

Corporate Spending

Corporate spending on equipment and software was unchanged in the third quarter, the weakest reading in three years, according to last week’s GDP report.

The divergence between domestic and foreign demand was evident in company earnings in the third quarter, with U.S. businesses insulated from the rest of the world doing better than those that are more dependent on sales to Europe and Asia.

Shares of Whirlpool Corp. (WHR), the world’s largest appliance maker, reached the highest level in more than two years last week after the company lifted its 2012 earnings forecast. The Benton Harbor, Michigan-based company received about 51 percent of its revenue from North America in its 2011 fiscal year, compared with 18 percent from Europe and 5 percent from Asia.

“We continue to see some early but consistent signs of housing recovery, which makes us increasingly optimistic about a more structural-demand recovery,” Marc Bitzer, president of Whirlpool North America, said during an Oct. 23 earnings call.

Third-quarter sales in North America were up 2 percent from the prior year. Excluding currency translation, sales dropped about 10 percent in the Europe, Middle East and Africa.

Forecast Cut

By contrast, DuPont Co. (DD), the most valuable U.S. chemical maker, posted a smaller-than-estimated third-quarter profit and cut its forecasts, while announcing it will eliminate 1,500 jobs. Shares last week fell to the lowest level in 10 months.

“Current uncertainty in the global economic outlook, softer demand in certain markets and strength in others, require realigning business resources,” Ellen Kullman, chairman and chief executive officer of the Wilmington, Delaware-based company, said during an Oct. 23 earnings call.

Thirty-five percent of DuPont’s 2011 fiscal-year revenue came from the U.S., 26 percent from Europe and 23 percent from the Asia-Pacific region. Third-quarter sales from continuing operations were down 4 percent in the U.S. and Canada from a year earlier and 12 percent in the rest of the world.

Recovery Seen

Jay Bryson, senior global economist at Wells Fargo Securities LLC in Charlotte, North Carolina, and Allen Sinai, chief executive officer of Decision Economics in New York, see reason for some optimism for a recovery in exports.

China’s economy, the world’s second largest, looks to have bottomed out after slowing for seven quarters, Sinai said, while Europe “can’t be in a recession forever”

Couple that with pent-up demand in the U.S. for housing and automobiles, and the economy is “laying the foundation for a considerably stronger performance,” Peter Hooper, a former Fed official who is now chief economist for Deutsche Bank AG in New York, said.

To contact the reporters on this story: Rich Miller in Washington at rmiller28@bloomberg.net; Alex Kowalski in Washington at akowalski13@bloomberg.net

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

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