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Business Title: Economy in U.S. Grows Less Than Forecast Economy in U.S. Grows Less Than Forecast The U.S. economy grew less than forecast in the second quarter, after almost coming to a halt at the start of the year, as consumers retrenched. Gross domestic product climbed at a 1.3 percent annual rate following a 0.4 percent gain in the prior quarter that was less than earlier estimated, Commerce Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 1.8 percent increase. Household purchases, about 70 percent of the economy, rose 0.1 percent. Slower job and income gains raise the risk that a pickup in purchases during the remainder of 2011 will fail to materialize. The faltering economy may get another blow from spending cuts being negotiated in Congress and is one reason why Federal Reserve Chairman Ben S. Bernanke has said policy makers need to keep all options open. “The economy is stuck in a very slow-growth scenario,” said Julia Coronado, chief economist for North America at BNP Paribas in New York. “Consumers are still very cautious and vulnerable. This is a very challenging report for policy makers.” Stock-index futures dropped after the report, and Treasury securities rose. The contract on the Standard & Poor’s 500 Index maturing in September fell 1 percent to 1,284.5 at 9:08 a.m. in New York. The yield on the benchmark 10-year note, which moves inversely to prices, decreased to 2.88 percent from 2.95 percent late yesterday. Forecasts of 85 economists in the survey ranged from 0.9 percent to 2.9 percent. At $13.27 trillion in the second quarter, GDP has yet to surpass the pre-recession peak. Growth in the first quarter was revised down from a 1.9 percent prior estimate, reflecting fewer inventories and more imports. Revisions to GDP figures going back to 2003 showed that the 2007-2009 recession took a bigger bite out of the economy than previously estimated and the recovery lost momentum throughout 2010. The world’s largest economy shrank 5.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the previously reported 4.1 percent drop. The second-worst contraction in the post-World War II era was a 3.7 percent decline in 1957-58. The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed at a 2.1 percent pace, the most since the last three months of 2009, compared with 1.6 percent in the first quarter, as higher oil and food costs pushed up the prices of other goods and services. The central bank’s longer-term projection is a range of 1.7 percent to 2 percent. “This is the worst of all worlds for investors, certainly the worst of all worlds for the Fed,” John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said in an interview on Bloomberg Television. “A little too much inflation, not enough growth, that is a tough scenario in the U.S.” Consumer spending from April through June showed the smallest gain since the second quarter of 2009, when the economy was in recession. The slump reflected a 4.4 percent plunge in purchases of durable goods like automobiles. 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 fewest in nine months, Labor Department figures showed on July 8. Purchase, New York-based PepsiCo Inc., the world’s largest snack-food maker, said profit this year will increase more slowly than it previously projected because of rising commodity costs and cooling customer demand. “It’s the consumer and competitive picture that has become more difficult than we expected,” Chief Executive Officer Indra Nooyi said on a July 21 conference call. Much of the growth in the second quarter came from business investment and trade. Spending on commercial structures, including factories and office building, and equipment contributed 0.6 percentage point to growth. The improvement in the difference between imports and exports added another 0.6 point. Overseas sales will remain a backstop for factories. Dow Chemical Co. (DOW), the largest U.S. chemical maker, said demand is “strong” in markets abroad. “We captured strong growth in Latin America, and the emerging geographies more broadly, while North America experienced moderate growth,” Andrew Liveris, chief executive officer, said on a July 27 conference call with analysts. Inventories grew in the second quarter at about the same pace as in the prior three months, adding 0.2 percentage point to GDP. A slump in government spending added to the economy’s woes last quarter. Outlays by state and local agencies dropped at a 3.4 percent annual pace, and non-military spending by the federal government slumped 7.3 percent, the most since 2006. “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. 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. 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. At the same time, 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 employment outlook remains dim, based on company announcements this month. San Jose, California-based Cisco Systems Inc. (CSCO), the world’s largest networking-equipment maker, plans to cut about 6,500 jobs worldwide. Goldman Sachs Group Inc. will reduce staff by about 1,000, and Lockheed Martin Corp. (LMT) 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. Today’s GDP estimate is the first of three for the quarter, with the other releases scheduled for August and September when more information becomes available.
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