Bloomberg News

Economy in U.S. Probably Expanded at the Slowest Pace in a Year

July 29, 2011

July 29 (Bloomberg) -- The U.S. economy probably grew in the second quarter at the slowest pace in a year as consumers cut back on spending, economists said ahead of a government report today.

Gross domestic product rose at a 1.8 percent annual rate after a 1.9 percent pace in the prior three months, according to the median forecast of 84 economists surveyed by Bloomberg News. Household purchases, the biggest part of the economy, climbed 0.8 percent, the weakest performance since the recession ended in 2009, the survey showed.

Slower job and income gains raise the risk that a pickup in purchases will fail to develop in the second half of 2011. With few drivers to spur the expansion, Chairman Ben S. Bernanke has said the Federal Reserve needs to keep all policy options open.

“There is still some uncertainty as to whether the second- half rebound materializes,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The slowdown in consumer spending is worrisome. The labor market doesn’t look healthy at all.”

The GDP report, due at 8:30 a.m. from the Commerce Department in Washington, is the first of three for the quarter, with the other releases scheduled for August and September when more information becomes available.

Survey estimates ranged from 0.9 percent to 2.9 percent. The Commerce Department today will also issue revisions going back to 2003.

The projected gain in second-quarter consumer spending, which accounts for about 70 percent of the economy, followed a 2.2 percent advance in the first three months of the year.

Food and Fuel

Higher expenses for necessities like food and energy may have curtailed spending on less essential items. The cost of a gallon of regular gasoline climbed in May to about $4 a gallon, the highest in almost three years, according to AAA, the nation’s biggest auto group.

The absence of faster job growth is also discouraging shoppers. The unemployment rate climbed to 9.2 percent in June while payrolls grew by 18,000, the smallest gain in nine months, Labor Department figures showed on July 8.

A pickup in spending will take time to develop, as consumers’ moods have soured. At 9:55 a.m., a report may show the Thomson Reuters/University of Michigan final index of consumer sentiment fell this month to the lowest level since March 2009, when the economy was still in a recession, economists projected. The Bloomberg Consumer Comfort Index, fell last week to the lowest level since May, data showed yesterday.

Business Spending

Business investment was probably one of the drivers of economic growth last quarter. Nonetheless, the government’s inability to agree on a budget and debt-limit increase may be making companies reluctant to order new equipment and hire in the second half.

The Institute for Supply Management-Chicago Inc.’s business barometer cooled to 60 this month, from 61.1 in June, according to the median forecast of economists surveyed by Bloomberg. The group’s report is due today at 9:45 a.m.

Shares of manufacturers have trailed the broader market since the beginning of the year. The Standard & Poor’s Supercomposite Machinery Index has declined 2.8 percent this year, while the broader S&P gauge is up 3.4 percent.

One area of weakness last quarter was auto purchases. Cars and light trucks sold at an average 12.1 annual rate in the April to June period, down from a 13 million pace in the first three months of the year, according to industry data.

Supply Shortage

A shortage of Japanese-made parts after the earthquake and tsunami in March slowed production at U.S. manufacturers. The shortage of components is projected to ease this quarter.

The employment outlook remains dim at the start of the third quarter, based on company announcements this month. San Jose, California-based Cisco Systems Inc., the world’s largest networking-equipment maker, plans to cut about 6,500 jobs worldwide. Goldman Sachs Group Inc. will reduce its staff by about 1,000, and Lockheed Martin Corp. will offer a voluntary separation plan to 6,500 employees.

“Recent economic data are clear -- the U.S. economy is still struggling to emerge from the Great Recession and unable to move to a path of vibrant and sustainable growth,” Dan DiMicco, chairman and chief executive officer at steelmaker Nucor Corp., said on a July 21 teleconference with analysts.

Another reason for concern is that much of the growth in the second quarter came from an expansion of inventories rather than from demand, economists including Feroli said. Waning domestic final sales -- which strip out inventories, exports and imports -- indicate the U.S. economy lacks the strength to accelerate.

The Fed said the economy grew at a slower pace since the beginning of June, according to its Beige Book survey released July 27. Growth cooled in eight of the Fed’s 12 regions, compared with four in the prior survey.

“In the very near term, the recovery is rather fragile,” Fed Chairman Bernanke told lawmakers on July 14. “We just want to make sure that we have the options when they become necessary” to stimulate the economy.

--With assistance from Chris Middleton in Washington. Editors: Vince Golle, Carlos Torres

To contact the reporter on this story: Shobhana Chandra in Washington at

To contact the editor responsible for this story: Christopher Wellisz in Washington at

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