Economy in U.S. Probably Grew at Slower Pace in Second Quarter
The U.S. economy probably grew in the second quarter at a slower pace, held back by the effects of federal budget cutbacks and higher taxes, economists said before a report today.
Gross domestic product, the value of all goods and services produced in the U.S., rose at a 1 percent annualized rate after a 1.8 percent gain in the previous three months, according to the median forecast of 84 economists surveyed by Bloomberg. Consumer spending, the biggest part of the economy, probably also cooled.
Job gains and rising home prices are shoring up Americans’ confidence and lifting automobile sales and production, making it likely the U.S. will pick up once government spending cuts pose less of a restraint. Federal Reserve officials, wrapping up a two-day meeting today, will evaluate the progress on growth and employment as they consider trimming monthly bond purchases.
“Fiscal tightening was a drag on growth but the bulk of it is over,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York. “We expect the fiscal headwinds will fade significantly in the second half. It lays the ground for a fairly healthy economy.”
The Commerce Department will release the GDP figures at 8:30 a.m. in Washington. Economists’ estimates ranged from a 0.1 percent drop to a 1.8 percent increase.
Another report at 8:15 a.m. may show private employers added 180,000 workers in July following a 188,000 increase the prior month, according to the median forecast in the Bloomberg survey. The ADP Research Institute’s data, released jointly with Moody’s Analytics Inc., exclude hiring at government agencies.
Overall payroll gains, which averaged 202,000 a month in the first half of this year, indicate the economy is doing better than it appears from the readings for economic growth.
The Commerce Department will issue comprehensive revisions that could affect data back to 1929.
The Fed may begin trimming in September its $85 billion in monthly bond purchases, according to a growing number of economists surveyed by Bloomberg from July 18 to July 22. None of the 54 respondents expect the reductions to begin following the conclusion of the central bank’s meeting today.
The Standard & Poor’s 500 (SPX) Index rose yesterday as investors weighed second-quarter earnings against the prospect for a change in Fed policy. The gauge has climbed 18.2 percent so far this year.
The GDP data may show consumer spending, which accounts for about 70 percent of the economy, grew at a 1.6 percent annualized rate from April through June, according to the Bloomberg survey median. The prior quarter’s 2.6 percent pace was the strongest since the first three months of 2011.
Some of the slowdown in consumption may have been the lingering effect of the payroll tax, which reverted to its 2010 rate of 6.2 percent in January after holding at 4.2 percent for two years, resulting in lower take-home pay.
At the same time, gains in hiring and record household wealth, that’s in large part driven by rising stock prices and home values, will support sentiment and allow Americans to sustain spending. The Bloomberg Consumer Comfort Index (COMFCOMF) matched its highest level in more than five years during the week ended July 21.
Some businesses are counting on an improvement in household spending to be reflected in growing demand at transportation companies.
“Later in the third quarter, the fourth quarter, there should be decent consumer sentiment for a strong retail season,” Eric Butler, an executive vice president at Omaha, Nebraska-based Union Pacific Corp. (UNP), the largest U.S. railroad company, said on a July 18 earnings call. “If that happens, you will need to move the business because there are not a lot of inventories out there. So that would suggest a pickup from where we are today.”
Purchases of big-ticket items such as automobiles remain a bright spot. Cars and light trucks sold at a 15.9 million annualized rate in June, the strongest since November 2007, according to figures from Ward’s Automotive Group.
The real-estate market also continues to strengthen as historically low borrowing costs drive demand and boost prices, indicating homebuilding may keep advancing. The S&P/Case-Shiller index of house values in 20 cities climbed 12.2 percent in May from a year earlier, the biggest 12-month gain since March 2006, a report showed yesterday.
United Technologies Corp. (UTX), the maker of Carrier air conditioners, Pratt & Whitney jet engines and Otis elevators, is among companies citing gains in auto sales and housing starts as reasons to expect an improvement in coming quarters.
“The economy is recovering and we are seeing strength in the leading sectors,” Gregory Hayes, chief financial officer at the Hartford, Connecticut-based company, said on a July 23 earnings call. “Talk about economic uncertainty remains, but overall, our orders position us well for growth in the second half of the year.”
Slower inventory building and weak overseas demand also may have restrained growth last quarter, economists said. As sales pick up, businesses may need to replenish stockpiles, which would provide a boost to production and hiring.
Economic confidence in the euro area improved for a third month in July, reaching the highest in 15 months, data showed yesterday, adding to signs the 17-nation currency bloc is emerging from a record-long recession.
To contact the reporter on this story: Shobhana Chandra in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Christopher Wellisz in Washington at email@example.com