Bloomberg News

U.S. Economy Grew 1.9% in First Quarter on Consumer Spending

June 28, 2012

Shopping in New York

Pedestrians holding shopping bags walk on Fifth Avenue in New York. Photographer: Jin Lee/Bloomberg

The U.S. economy grew 1.9 percent in the first quarter, reflecting a gain in consumer spending that now shows signs of cooling as the labor market weakens.

The revised gross domestic product reading matched the increase previously calculated by the government, Commerce Department figures showed today in Washington. Corporate profits were revised to show a drop, the first in more than three years.

Slowing sales at companies from Darden Restaurants Inc. (DRI:US) to O’Reilly Automotive Inc. (ORLY:US) indicate American households are reluctant to boost their spending, which accounts for about 70 percent of the economy. A struggling job market and slowing global markets will make it harder to spur the U.S. expansion, underscoring the concern of Federal Reserve policy makers.

“The economy is really in a difficult spot at the moment,” said Jeremy Lawson, a senior U.S. economist at BNP Paribas in New York. “With the labor market weak and the outlook for incomes weak, it’s hard to see how consumer spending can grow solidly.”

The median forecast of economists surveyed by Bloomberg News was 1.9 percent following a 3 percent increase in the prior quarter. Projections of the 75 economists polled ranged from 1.5 percent to 2.3 percent. The government’s GDP estimate is the third and final for the first quarter.

The number of applications for unemployment benefits hovered last week near the highest level of the year, showing little improvement in the labor market, another report today showed.

Jobless Claims

Jobless claims decreased by 6,000 to 386,000 in the week ended June 23, in line with the median forecast of economists surveyed by Bloomberg News, according to data from the Labor Department. The prior week’s reading was revised up to 392,000 from 387,000, matching an April figure as the steepest of 2012.

Stock-index futures held earlier losses after the reports. The contract on the Standard & Poor’s 500 Index maturing in September fell 0.5 percent to 1,319.1 at 8:47 a.m. in New York as investors waited to see if European leaders could formulate news plans to address the debt crisis during a two-day summit.

The GDP revision reflected a smaller gain in consumer spending that was offset by a gain in commercial construction and a smaller trade deficit than previously reported.

Household purchases rose at a 2.5 percent annual pace compared with a previously reported 2.7 percent gain. The prior quarter’s rise was 2.1 percent.

Retail Sales

The smallest wage gains in a year and unemployment exceeding 8 percent are taking a toll on shoppers. Retail sales fell 0.2 percent in May, matching the decrease in April, Commerce Department figures showed earlier this month. Sales excluding car dealerships slumped by the most in two years.

Darden, owner of the Red Lobster, Olive Garden and LongHorn Steakhouse restaurant chains, reported fourth-quarter revenue that trailed analysts’ estimates because of an unexpected drop in sales at its older establishments. The company said customers grew more cautious in May, and it will focus more on affordability in its promotional offers.

“We saw the consumer get a lot more cautious in May,” Clarence Otis, chairman and chief executive officer at Darden, said on a June 22 conference call with analysts. “And that was not just at Red Lobster, but across the restaurant industry” and “generally across the overall consumer environment beyond restaurants.”

Households are trimming purchases of expensive items like automobiles as the labor market softens. Cars and light trucks sold at a 13.7 million annual rate in May, the weakest this year and down from April’s 14.4 million pace, Ward’s Automotive Group data showed.

Demand Cools

O’Reilly Automotive, a retailer of auto parts, tools and accessories, this week said second-quarter profit will be on the lower end of its forecast range as sales growth was slower than expected. Same-store sales for the period may increase as much as 2.5 percent, compared with the earlier forecast of as much as 5 percent, it said.

Manufacturing, a mainstay of the economy, also is losing speed, according to some regional reports. Factories in the Philadelphia area shrank in June at the fastest pace in almost a year, while those in the New York region expanded at the slowest pace in seven months.

At the same time, orders for capital goods rose 1.1 percent in May, the first increase since February, helping to ease concern that businesses will retrench amid a global economic slowdown that’s curbing demand.

No Pickup

Economists at some of the largest banks on Wall Street are forecasting no pickup in growth this quarter. Following yesterday’s report on durable goods, Bank of America Corp.’s so- called tracking estimate for GDP -- which captures the latest data available -- stood at 1.8 percent. Goldman Sachs Group Inc.’s estimate was 1.6 percent, Morgan Stanley’s was 1.9 percent and Barclays Plc’s was 1.7 percent.

Today’s report showed corporate profits fell 0.3 percent in the first quarter from the prior three months, the first decrease since the fourth quarter of 2008, during the last recession. They were up 5.5 percent from a year earlier.

The Fed on June 20 pledged to keep its benchmark interest rate near zero until at least through late 2014. The central bank announced it’ll expand the Operation Twist program to extend the maturities of assets on its balance sheet, and said it stands ready to take further action as needed.

“The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually,” policy makers said in a statement. Fed officials also lowered their outlook for growth and employment.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net


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Companies Mentioned

  • DRI
    (Darden Restaurants Inc)
    • $57.37 USD
    • -0.35
    • -0.61%
  • ORLY
    (O'Reilly Automotive Inc)
    • $193.14 USD
    • -0.44
    • -0.23%
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