U.S. Economy Grows 1.5% in Q2

Consumer spending slows amid softening job market.

The U.S. economy expanded at a slower pace in the second quarter as a softening job market prompted Americans to curb spending.

Gross domestic product, the value of all goods and services produced, rose at a 1.5 percent annual rate after a revised 2 percent gain in the prior quarter, Commerce Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 1.4 percent increase. Household purchases, which account for about 70 percent of the world’s largest economy, grew at the slowest pace in a year.

Consumers are cutting back just as Europe’s debt crisis and looming U.S. tax-policy changes dent confidence, hurting sales at companies from United Parcel Service Inc. to Procter & Gamble Co. Cooling growth makes it harder to reduce unemployment, helping explain why Federal Reserve Chairman Ben S. Bernanke has said policy makers stand ready with more stimulus if needed.

“We’re starting the second half on a not-so-good footing,” Michael Hanson, a senior U.S. economist at Bank of America Corp. in New York, said before the report. “The economy is slowing notably. Given the risks, it is unlikely the Fed will sit on their hands the rest of the year.”

Forecasts of 82 economists in the survey ranged from gains of 0.7 percent to 1.9 percent. The GDP estimate is the first of three for the quarter, with the other releases scheduled for August and September when more information becomes available.

With today’s release, the Commerce Department’s Bureau of Economic Analysis also issued revisions dating back to the first quarter of 2009. The changes showed the first year of the recovery from the worst recession in the post-World War II era was even weaker than previously estimated.

GDP grew 2.5 percent in the 12 months after the contraction ended in June 2009, compared with the 3.3 percent gain previously reported, the Commerce Department said.

The final quarter of last year was revised up to a 4.1 percent gain, the best performance in almost six years, underscoring a more marked slowdown in the first half of 2012. The fourth quarter gain was previously reported as 3 percent.

Today’s report showed household consumption rose at a 1.5 percent from April through June, down from a 2.4 percent gain in the prior quarter. The median forecast in the Bloomberg survey called for a 1.3 percent advance. Purchases added 1.05 percentage points to growth.

Recent data signal consumers are reluctant to step up purchases. Retail sales fell in June for a third consecutive month, the longest period of declines since 2008. Same-store sales rose less than analysts’ estimates at retailers including Target Corp. and Macy’s Inc.

 

Slowing Sales

Slowing sales and currency fluctuations led Procter & Gamble, the world’s largest consumer products company, to cut profit forecasts three times this year.

Among frugal consumers is Roger Szemraj, a lobbyist for the food industry with OFW Law in Washington, who drives a hybrid car and said his routine has always been to find the grocery store with the best deals.

“We are always looking to see what are the sales items and try to buy in that instance,” said Szemraj who was shopping at Safeway Inc. store in the Georgetown neighborhood of Washington because of a sale on lamb. “It’s a matter of looking to see what the sales price is.”

Consumers may remain cautious until hiring accelerates. Payroll gains averaged 75,000 in the second quarter, down from 226,000 in the prior three months and the weakest in almost two years. The unemployment rate, which held at 8.2 percent in June, has exceeded 8 percent for 41 straight months.

Bernanke told lawmakers last week that progress in reducing the jobless rate probably will be “frustratingly slow.”

“Economic activity appears to have decelerated somewhat during the first half of this year,” Bernanke said in testimony to Congress. The Fed is “prepared to take further action as appropriate to promote a stronger economic recovery.”

Jobs and the economy are central themes in the presidential campaign, with President Barack Obama and Republican challenger Mitt Romney sparring over who can best revitalize the recovery.

UPS, the world’s largest package-delivery company, cut its full-year profit forecast after a drop in second-quarter international package sales. The Atlanta-based company, considered an economic bellwether because it moves goods ranging from financial documents to pharmaceuticals, projects the U.S. will grow 1 percent in the remainder of 2012.

 

Global Slowdown

“Economies around the world are showing signs of weakening and our customers are increasingly nervous,” Chief Executive Officer Scott Davis said on a July 24 call with analysts. “In the U.S., uncertainty stemming from this year’s elections and the looming fiscal cliff constrains the ability of businesses to make important decisions such as hiring new employees, making capital investments, and restocking inventories.”

Cutbacks by government agencies continued to hinder growth as spending dropped at a 1.4 percent annual rate in the first quarter, the ninth decrease in the last 10 periods. The decline was led by a 2.1 percent fall at the state and local level that marked an 11th consecutive drop.

Business investment cooled last quarter reflecting stagnant spending on commercial construction projects. Corporate spending on equipment and software improved, climbing at a 7.2 percent pace, up from a 5.4 percent increase in the previous quarter

A report yesterday showed the corporate spending outlook has dimmed. Bookings for non-military capital goods excluding aircraft, a proxy for future investment, fell at a 3.1 percent annual rate in the second quarter, the first decrease since the same period in 2009, when the U.S. was still in a recession, according to Commerce Department data.

A pickup in homebuilding has helped some manufacturers to fare better. Caterpillar Inc., the largest maker of construction and mining equipment, this week raised its full-year profit forecast on increased demand from North American builders.

“We are planning for a world that is growing anemically in the next 24 months,” Chief Executive Officer Doug Oberhelman said on a July 25 conference call to discuss his company’s earnings. “We are not planning for an implosion.”

A measure of inflation, which is tied to consumer spending, climbed at a 0.7 percent annual pace in the second quarter, the smallest gain in two years. The slowdown in spending combined with less inflation helped boost the personal saving rate to 4 percent from 3.6 percent in the prior period.

 

Bloomberg News
 

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