Second-Half U.S. Rebound Intact Even After Hiring Cools: Economy
Economists are sticking with forecasts that the U.S. economy will pick up in the second half of the year even after a slow start in employment.
Gross domestic product will climb at a 2.5 percent annualized rate from July through December, up from a 1.4 percent gain in the first six months of 2013 and little changed from the pace projected last month, according to a Bloomberg survey of 59 economists conducted Aug. 2 to Aug. 6. Labor Department figures last week showed employers added 162,000 workers to payrolls in July, the fewest in four months.
Gains in manufacturing, record exports, looser bank lending and a sustained housing recovery are raising the odds the economy will accelerate after government cutbacks slowed growth. Economists this month also projected unemployment will drop to 7 percent by the middle of 2014, matching the timeline Federal Reserve Chairman Ben S. Bernanke laid out in predicting when the central bank’s monthly bond purchases will end.
The Fed “wanted to see consistent job gains rather than a dramatic pickup and that’s what we’re seeing,” said Maury Harris, the New York-based chief U.S. economist for UBS Securities LLC and the best GDP forecaster over the past two years, according to data compiled by Bloomberg. He projects growth will average 3.1 percent in the last six months of 2013.
Harris said his estimates got a boost this week when a Fed survey showed banks are seeing an increase in demand for credit and are providing loans more readily to home buyers and businesses. Banks reported easing lending terms to businesses of all sizes as demand picked up and competition increased.
“We continue to see further easing of bank-lending standards, and that is a leading indicator,” said Harris.
Stocks fell today, sending the Standard & Poor’s 500 Index (COMFCOMF) down for a third day, as investors speculated an improving economy would mean Fed policy makers would soon cut back on bond purchases. The S&P 500 dropped 0.7 percent to 1,685.75 at 10:15 a.m. in New York.
Central bankers on the other side of the Atlantic are echoing the Fed’s labor-market peg. Bank of England Governor Mark Carney today for the first time linked the monetary policy outlook to unemployment, saying officials are unlikely to tighten policy as long as the jobless rate exceeds 7 percent.
More freely flowing credit can help to further unleash pent-up demand for cars and houses that will propel consumer spending, which accounts for about 70 percent of the economy. Auto sales are heading for their best year since 2007, while combined purchases of new and existing houses have climbed to the highest point since a government first-time buyer credit was first set to expire more than three years ago.
“With the strength we’re seeing in household wealth, consumer sentiment, housing, and manufacturing, we think there’s definitely more room to grow this year,” Kurt McNeil, a vice president at General Motors Co. (GM), said on an Aug. 1 conference call.
While the gain in payrolls last month was shy of the 185,000 the median forecast of economists surveyed by Bloomberg before the report, sustained increases in hiring and falling unemployment are helping boost confidence and spending.
The jobless rate dropped more than projected last month, reaching a four-year low of 7.4 percent, Labor Department data showed. The average increase in payrolls so far this year is 192,000 a month, compared with 183,000 in 2012.
The Bloomberg Consumer Comfort Index reached a five-year high in July as Americans gained confidence the economic expansion was gaining momentum.
“The key thing, of course, is jobs,” said Michael Carey, chief economist for North America at Credit Agricole CIB and the second-best New York-based GDP forecaster over the past two years, according to data compiled by Bloomberg. “The downside is still that earnings are soft, but we are seeing slow improvement in employment prospects.”
Carey projects payrolls will climb by about 190,000 a month on average over the next year.
“I think it’s pretty easy to get to 3 percent growth by the end of the year,” said Carey. “Then I think it begins to feed on itself.”
The recovery in housing is rippling throughout the economy, from retailers such as hhgregg Inc. to flooring products-maker Mohawk Industries Inc. (MHK) Sales at hhgregg stores open at least 12 months climbed last quarter from a year earlier for the first time since the end of 2011, the Indianapolis-based electronics and appliances retailer reported Aug. 1.
“We think the industry’s got some tailwind,” Dennis May, president and chief executive officer, said on an earnings call. “Business is going to continue to improve.”
Net sales at Calhoun, Georgia-based Mohawk rose about 35 percent in the second quarter from a year earlier, the company said on Aug. 2.
“The U.S. flooring industry continues to improve, with new residential construction up significantly for the year, remodeling gaining strength and commercial construction continuing to grow,” Jeffrey S. Lorberbaum, chairman and chief executive officer at Mohawk, said on a conference call.
After expanding at a 1.8 percent pace in the first quarter, household purchases will gain traction for the rest of 2013, culminating in a 2.4 percent fourth-quarter gain, according to the median forecast in this month’s Bloomberg survey.
Spending in the first six months of the year was restrained by a 2 percentage-point increase in the payroll levy used to fund Social Security, which reverted to its 2010 level of 6.2 percent from 4.2 percent. Income taxes for the highest earners also went up.
“The risk is to the upside in our forecasts, mostly with consumer spending faring better,” said Michelle Meyer, a senior economist at Bank of America Corp. in New York. “Consumers survived the increase in taxes in the first half of the year.”
At 2.25 percent, Bank of America is projecting a slightly slower rebound in growth in the second half of this year than the survey median, followed by a more pronounced 3 percent advance in the first six months of 2014. The automatic across-the-board government budget cuts known as sequestration that took effect in March will continue to weigh on growth, said Meyer.
“We don’t think we’ve seen the full impact from the sequester just yet, and that not only means government spending will keep dropping, but it will also hurt business investment,” she said.
Fed policy makers have focused on the job market to determine when to begin scaling back the central bank’s $85 billion in monthly bond purchases. Officials have said they will continue the program until the labor market has improved “substantially.”
Bernanke said in a press conference after the Federal Open Market Committee’s June 18-19 meeting that the Fed may trim its program later this year and halt it around mid-2014, at which time the jobless rate will probably be around 7 percent. The Bloomberg survey this month showed economists agree the rate will reach that level by the end of the second quarter.
While the timing of an announcement of a reduction in bond purchases is a close call between the September and December Fed meetings, economists at Bank of America are leaning toward the latter, said Meyer.
Because Commerce Department revisions last week showed the world’s largest economy grew less than previously projected in the year through March, Fed officials will probably need to lower their 2013 growth forecasts at the September meeting, said Meyer. That may “complicate the message around tapering,” she said. “There’s a marginally better chance in our view for December, but we don’t have a strong conviction.”
UBS’ Harris is more confident the announcement of a change in course will come next month.
“The fact that you no longer have the downside risks, in and of itself, is enough of a positive,” Harris said.
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