U.S. Economy: Recovery Sputters, Consumer Confidence Sinks

Economy in U.S. Expanded at 1% Annual Pace in Second Quarter
Welder Frank Galvan works on a high-pressure line during construction of the Triton Oil and Gas Drilling Rig at the Orion Drilling Co. yard in Corpus Christi, Texas. Photographer: Eddie Seal/Bloomberg

The U.S. economy expanded less than previously estimated in the second quarter, underscoring the weakness that has prompted the Federal Reserve to mark down its growth forecasts.

Gross domestic product climbed at a 1 percent annual rate from April through June, down from a 1.3 percent prior estimate, revised Commerce Department figures showed today in Washington.

Fed Chairman Ben S. Bernanke, speaking today at a conference in Wyoming, said the central bank still has tools to spur the economy without signaling whether policy makers are likely to deploy them. Another report showed consumer sentiment this month fell to the lowest level since November 2008 amid financial-market turmoil and political wrangling over the budget deficit.

“The consumer is clearly unnerved,” said John Herrmann, senior fixed-income strategist at State Street Global Markets LLC in Boston. “With growth so tepid and the economy so fragile, any kind of shock could tip us over into a double-dip recession.”

Stocks erased early losses after Bernanke’s comments. The Standard & Poor’s 500 Index, which broke a four-week losing streak, rose 1.5 percent to 1,176.8 at the 4 p.m. in New York. Treasury securities also climbed, sending the yield on the benchmark 10-year note down to 2.19 percent from 2.23 percent late yesterday.

The median forecast of 81 economists surveyed by Bloomberg News called for a 1.1 percent increase in GDP. Estimates ranged from 0.3 percent to 1.6 percent.

Recovery Weakens

Combined with the 0.4 percent annual rate of growth in the first three months of the year, the past two quarters were the weakest of the recovery that began in mid 2009. At $13.26 trillion, GDP has yet to surpass the pre-recession peak.

The report also contained some positive news as corporate profits grew and wages and salaries were revised up at the start of the year to show the biggest gain in more than four years.

The Thomson Reuters/University of Michigan sentiment measure fell to 55.7 this month from 63.7 in July, pointing to little pickup in the biggest part of the economy.

“Consumers don’t look like they’re in much of a mood to buy,” said Robert Brusca, chief economist at Fact & Opinion Economics in New York. “The economy continues weaker than we thought. It looks like it’s losing momentum.”

Consumer spending, about 70 percent of the economy, grew at a 0.4 percent annual rate in the first quarter, the smallest gain in more than a year. Nonetheless, the reading was revised up from the 0.1 percent previously estimated, reflecting more outlays for financial services, insurance and health care, today’s GDP report showed.

Cutting Forecasts

Economists have cut growth forecasts as the S&P 500 slumped 18 percent between April 29 and Aug. 8, following S&P’s downgrade of U.S. debt amid wrangling over deficit-cutting measures and on rising concerns of a euro zone default.

IHS Global Insight Inc., a Lexington, Massachusetts-based research firm, this week raised the odds of a recession to around 40 percent from a prior 20 percent to 25 percent probability. It cut its growth forecast for 2011 to 1.6 percent from 2.5 percent, adding that a “double-dip downturn is still not the most likely scenario.”

“It appears that the U.S. economy is losing further momentum,” Goldman Sachs Group Inc. said Aug. 19. While several indicators for July were “surprisingly strong,” economist Zach Pandl wrote that “timelier survey-based data have turned down sharply, and weakness in the hard statistics seems likely to follow.”

No Pickup Seen

Goldman Sachs cut its GDP forecast to 1 percent in the third quarter and 1.5 percent in the fourth quarter, both from prior 2 percent estimates. The bank’s economists said on Aug. 5 that they saw a one-in-three chance of another recession.

Lack of jobs is discouraging shoppers. Payrolls grew by about 95,000 in August, according to the median forecast of economists surveyed so far by Bloomberg before the Sept. 2 jobs report. That would compare with 117,000 in July which brought the average gain over the past three months to 111,000. Employment gains averaged 204,000 in the first four months of the year.

“Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years,” Bernanke said in prepared comments at Jackson Hole symposium hosted by the Kansas City Fed. “The Federal Reserve has a range of tools that could be used to provide additional monetary stimulus,” he said.

Falling Sales

Lowe’s Cos., the second-largest U.S. home-improvement retailer, said profit in its fiscal 2011 will be less than it previously projected as sales drop at stores open more than a year. The company also announced it would close seven “under-performing” stores.

“Recent headlines regarding slowing growth and the U.S. credit rating downgrade underscore the continued weakness in the U.S. economy,” Robert A. Niblock, chairman and president, said on an Aug. 15 conference call. “The volume of negative news and the unsettling impact on equity markets is having a significant effect on an already fragile consumer mindset.”

Wages and salaries climbed by $101.2 billion from January through March, the biggest increase since the last three months of 2006 and up from a prior estimate of $82.8 billion, today’s GDP report showed.

Today’s report also offered a first look at profits. Earnings climbed 3 percent from the prior quarter, after rising 1 percent in the prior period. They climbed 8.3 percent from the same time last year.

Inventories, Exports

The cut in second-quarter growth reflected a smaller increase in inventories and fewer exports. Inventories subtracted 0.2 percentage point from growth last quarter, instead of adding 0.2 point. Fewer exports also meant trade added 0.1 point to GDP rather than 0.6 percentage point.

The bigger increase in consumer spending and more business investment prevented growth from being revised down even more.

The economy last quarter was also hurt by a drop in government spending as state and local agencies tried to close budget gaps.

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