IBJNews

Slower U.S. growth might lead Fed to keep up stimulus

Back to TopCommentsE-mailPrintBookmark and Share

The U.S. economy may not be strong enough for the Federal Reserve to slow its bond purchases later this year.

That's the takeaway from economists after the government cut its estimate Wednesday of growth in the January-March quarter to a 1.8-percent annual rate, sharply below its previous estimate of a 2.4-percent rate. The main reason: Consumers spent less than previously thought.

Most economists think growth will remain low as consumers and businesses continue to adjust to federal spending cuts and higher taxes. Growth is expected to reach an annual rate of only about 2 percent in the April-June quarter. Even if the economy improves slightly, it would be hard to meet the Fed's forecast of 2.3-percent to 2.6-percent growth for 2013.

Chairman Ben Bernanke rattled investors last week when he said the Fed will likely slow its bond-buying this year if the economy continues to strengthen. The bond purchases have helped keep interest rates low. Bernanke added that if the economy weakens, the Fed won't hesitate to delay its pullback or even step up its bond purchases again.

Jennifer Lee, senior economist at BMO Capital Markets, said that if the April-June quarter proves tepid, the Fed will be looking at three straight quarters of subpar growth.

"The Fed won't taper (its bond purchases) under these conditions," Lee said. "They need convincing signs of a pickup."

Joel Naroff, chief economist at Naroff Economic Advisers, said he suspects the Fed will wait until next year to slow its bond buying. Like most economists, Naroff thinks growth will pick up in the October-December quarter and strengthen in 2014.

"If the Fed doesn't take notice of this revision to growth, they would run the risk of being perceived as largely clueless about the economy," Naroff said.

Stocks surged Wednesday, a sign that many investors also suspect the economy may prove too weak for the Fed to begin scaling back its stimulus later this year. The Dow Jones industrial average closed up nearly 150 points. Broader stock indexes also surged.

Most of the revision to last quarter's growth was due to a decline in consumer spending to an annual rate of 2.6 percent. Though that pace is the fastest in two years, it's sharply below the 3.4-percent rate previously estimated .

A key factor was weaker spending on services, such as travel, legal services, health care and utilities. Spending on long-lasting manufactured goods, considered a barometer of consumers' confidence in the economy, was stronger than previously estimated.

Some economists said the lower estimate suggests that an increase in Social Security taxes that took effect this year might be squeezing consumers more than expected. The tax increase has reduced take-home pay for most Americans. A person earning $50,000 a year has roughly $1,000 less to spend. A high-earning couple has up to $4,500 less.

"There was still acceleration in the growth of consumer spending — just not as much," said Paul Edelstein, director of financial services at IHS Global Insight.

The government's revisions also pointed to less export growth and weaker business investment spending, due mainly to less spending on buildings than previously estimated.

For each quarter, the government issues three estimates of growth as it collects increasingly precise data on the nation's gross domestic product. GDP reflects the economy's total output of goods and services, from haircuts to aircraft carriers.

In Wednesday's third and final estimate of first-quarter growth, for example, the government lowered its figure for consumer spending based on newly available data from a quarterly Census Bureau survey of services spending.

Edelstein cautioned that the government has trouble calculating spending on services. The estimate could change further next month, when the government will issue the revisions it makes to GDP every five years. These revisions incorporate data from the Census Bureau, Internal Revenue Service and other agencies.

Wednesday's revision of 0.6 percentage points was larger than the government usually makes in its third estimate of GDP. From 1983 through 2009, the average change from the second to third estimate was 0.2 percentage point, the department says.

But the change from the first estimate to its third one — from an annual rate of 2.5-percent growth to a 1.8-percent rate — was close to the average: 0.6 percentage point.

"We do not want to overreact to the Q1 data," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities. He noted that the government has tended to revise up its monthly employment data — a trend, that if it continued, would "suggest on balance that real GDP growth could be understated."

The biggest drag on the economy remains government spending. It fell during the first quarter at an annual rate of 4.8 percent. That shaved 0.9 percentage point from growth.

Economists expect steep federal spending cuts to continue to weigh on growth in the second and third quarters. Edelstein predicts annual growth rates of just 1.5 percent in the current quarter and 1.8 percent in the July-September quarter.

Naroff is more optimistic than most: He's forecasting annual growth rates of 2.5 percent in both quarters.

Still, both think the Fed is unlikely to scale back its bond purchases until annual growth moves closer to 3 percent.

Mark Zandi, chief economist at Moody's Analytics, said he suspects the Fed will wait until its December meeting to slow its bond purchases, rather than in September as many have been predicting.

Zandi thinks the unemployment rate should reach 7 percent by the middle of next year, in line with the Fed's projections. It's now 7.6 percent.

The latest economic reports have been encouraging. U.S. factories are fielding more orders. Higher home sales and prices are signaling a steady housing recovery.

Spending at retail businesses rose in May. And employers added 175,000 jobs last month, which almost exactly matched the average increase of the previous 12 months.

Stable job growth has gradually reduced the unemployment rate to 7.6 percent from a peak of 10 percent in 2009. And it's lifted Americans' confidence in the economy to its highest point in 5-1/2 years.

"If growth accelerates in the fourth quarter, and that is followed by better growth next year, that would be the development that is necessary to convince everyone on the Fed that there are minimal risks to the economy from starting to taper the bond buys," Naroff said. "I don't see that happening until the spring."

ADVERTISEMENT

  • This Can't be True
    There is zero truth to this story. Our economy is doing just fine. its getting better every day and more people are getting jobs. i know this because MSNBC told me so!

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT

facebook - twitter on Facebook & Twitter

Follow on TwitterFollow IBJ on Facebook:
Follow on TwitterFollow IBJ's Tweets on these topics:
 
Subscribe to IBJ
  1. John, unfortunately CTRWD wants to put the tank(s) right next to a nature preserve and at the southern entrance to Carmel off of Keystone. Not exactly the kind of message you want to send to residents and visitors (come see our tanks as you enter our city and we build stuff in nature preserves...

  2. 85 feet for an ambitious project? I could shoot ej*culate farther than that.

  3. I tried, can't take it anymore. Untill Katz is replaced I can't listen anymore.

  4. Perhaps, but they've had a very active program to reduce rainwater/sump pump inflows for a number of years. But you are correct that controlling these peak flows will require spending more money - surge tanks, lines or removing storm water inflow at the source.

  5. All sewage goes to the Carmel treatment plant on the White River at 96th St. Rainfall should not affect sewage flows, but somehow it does - and the increased rate is more than the plant can handle a few times each year. One big source is typically homeowners who have their sump pumps connect into the sanitary sewer line rather than to the storm sewer line or yard. So we (Carmel and Clay Twp) need someway to hold the excess flow for a few days until the plant can process this material. Carmel wants the surge tank located at the treatment plant but than means an expensive underground line has to be installed through residential areas while CTRWD wants the surge tank located further 'upstream' from the treatment plant which costs less. Either solution works from an environmental control perspective. The less expensive solution means some people would likely have an unsightly tank near them. Carmel wants the more expensive solution - surprise!

ADVERTISEMENT