U.S. second-quarter growth forecasts cut on tepid consumer spending

WASHINGTON Thu Jun 26, 2014 1:04pm EDT

1 of 2. A customer counts his cash at the checkout lane of a Walmart store in the Porter Ranch section of Los Angeles November 26, 2013.

Credit: Reuters/Kevork Djansezian

WASHINGTON (Reuters) - U.S. consumer spending rose less than expected in May, prompting economists to downgrade estimates for second-quarter growth.

There is, however, little doubt the economy is expanding. Another report on Thursday showed the number of Americans seeking unemployment benefits fell again last week.

Even as they lowered growth forecasts for this quarter, economists noted a jump in spending on durable goods and said they were uncertain how much spending was really buckling given problems calculating outlays for healthcare.

Healthcare spending has been volatile with the implementation of President Barack Obama's signature law early this year, but the swings should subside as the year progresses, economists said.

"We have evidence of consumer spending continuing at a very good pace in June. That limits my concerns," said Anthony Karydakis, chief economic strategist at Miller Tabak in New York.

Consumer spending increased 0.2 percent in May after being flat in April, and was down for a second straight month when adjusted for inflation, the Commerce Department said.

That suggests consumer spending, which accounts for more than two-thirds of U.S. economic activity, could struggle to regain momentum this quarter after growing at its slowest pace in nearly five years in the first three months of the year.

Spending in May was probably constrained by healthcare, as inflation-adjusted outlays on services fell for a second month. Spending on automobiles, however, surged, accounting for more than half of the 1 percent rise in durable goods.

At the same time, income increased for a fifth successive month, with savings hitting an eight-month high.

"This should give some ammunition for consumers going forward," said Eugenio Aleman, a senior economist at Wells Fargo Securities in Charlotte, North Carolina, who nevertheless cautioned that rising gasoline prices presented a risk.

Healthcare was behind a sharp downward revision to first-quarter gross domestic product data, released on Wednesday. The government slashed its growth estimate to show the economy contracting at a 2.9 percent annual rate, the worst performance in five years, instead of only a 1 percent pace.

In the wake of the spending data, second-quarter growth estimates which had ranged as high as a 4.0 percent rate were cut to as low as a 2.2 percent pace.

INFLATION TRENDING HIGHER

U.S. stocks were trading lower, pressured by comments from a top Federal Reserve official who said the central bank might need to move interest rates up more quickly than markets expect. U.S. Treasury debt prices rose, while the dollar was little changed against a basket of currencies.

In a separate report, the Labor Department said new applications for state unemployment benefits slipped 2,000 to a seasonally adjusted 312,000 for the week ended June 21.

The declining claims suggest a recent streak of monthly payroll job gains above 200,000 is likely to be sustained, lending the economy enough momentum for inflation to start perking up.

A price index for consumer spending increased 0.2 percent in May, rising by the same margin for a third consecutive month.

In the 12 months through May, the personal consumption expenditures (PCE) price index was up 1.8 percent, the largest gain since October 2012. It had advanced 1.6 percent in April.

Excluding food and energy, prices also posted a 0.2 percent gain. This so-called core index increased 1.5 percent from a year ago, the biggest gain since February last year.

Both gauges, however, remain below the Fed's 2 percent goal.

"These are not scary inflation numbers by any means but we are getting close to the Fed's target," said John Ryding, chief economist at RDQ Economics in New York. "The inflation rate is another signal that suggests the Fed should begin renormalizing monetary policy sooner than the market expects."

St. Louis Federal Reserve Bank President James Bullard told Fox Business News that his forecasts suggest inflation would reach the central bank's target this year with the jobless rate falling below 6 percent. It stood at 6.3 percent in May.

"You are basically going to be near normal on both dimensions basically later this year," he said. "That's shocking, and I don't think markets, and I'm not sure policymakers, have really digested that that's where we are."

The Fed, which is scaling back the amount of money it is pumping into the economy through monthly bond purchases, has kept its benchmark lending rate near zero since December 2008.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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Comments (19)
BeRealistic wrote:
First, a look at the past few weeks shows a rather flat trendline, though a slightly increasing number of first time jobless claimes. Also, we saw headlines and story yesterday detailing the area of job growth – “U.S. services sector expands at fastest pace in four-and-a-half years” (http://www.reuters.com/article/2014/06/25/us-usa-economy-markit-services-idUSKBN0F01L820140625) – Yeah, great that we can get these college grads into some of the finest waitstaff and counterhelp jobs available.

In regard to the 12,000 and 52,000 numbers remember – “continuing claims figures excludes several groups, including workers not eligible for unemployment insurance and workers who have exhausted their benefits. For instance, in 2008, only 36% of unemployed persons received unemployment benefits according to the Department of Labor.” So in the short term more people are receiving UI and in the long term, it is likely that most of the 52,000 have fallen off the elegibility list but not employed.

The net of this story, if you accept teh numbers at face value is no change +2000 last week, -2000 this week. Running average however is up. Let me sum it up like this, the labor market is not healing, people who are going to work are getting low wages and jobs beneath their capacity. When looking at the people the numbers ignore, unemployment is sill in the teens. Yes, the reporting method is the same as always (decades), however in this “new” obama economy, this method has become absolutely irrelevant at providing any meaningful information. Even the usual obama cheerleaders here at Reuters are having a hard getting enthusiastic about spinning the weekly failures.

Jun 26, 2014 9:23am EDT  --  Report as abuse
BeRealistic wrote:
“Second-quarter growth estimates have ranged as high as a 4.0 percent annual pace” Another one of those rosy forward looking predictions that we will see fall short of reality. Why do so many pin their view the left’s economy on the constant happy predictions that routinely turn out to be so far off from reality. Like dreams of winning the lottery, yet every week you realize instead of being a gazillionaire, you are just another hundred dollars poorer.

Jun 26, 2014 9:29am EDT  --  Report as abuse
BioStudies wrote:
How long are you going to write lies and expect us to believe it Reuters?

Lets talk about labor force participation shall we? Oh wait that would ruin the narrative that this rag has that socialism is what is best for society.

Jun 26, 2014 9:42am EDT  --  Report as abuse
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