Economy in U.S. grew less than projected in first quarter

The economy in the U.S. grew less than previously calculated in the first quarter, reflecting less spending on services by consumers who were trying to make ends meet after taxes rose.

Gross domestic product expanded at a revised 1.8% annualized rate from January through March, down from a prior estimate of 2.4%, figures from the Commerce Department showed today in Washington. Household purchases, which account for about 70% of the economy, were revised to a 2.6% advance compared with the 3.4% gain estimated last month.

Households cut back on travel, legal services and personal care expenditures and also curbed spending on health care as the two percentage-point increase in the payroll tax caused incomes to drop by the most in more than four years. A housing rebound and improving job market will probably help revive purchases in the second half of the year, one reason economists project the economy can withstand the automatic government budget cuts.

“We just got off to a slower start than expected,” said Maury Harris, the New York-based chief economist for UBS Securities LLC, who projected a 2.1% advance in GDP. “The second half will be better,” he said, because banks are making it easier to borrow.

Stocks rose, sending the Standard & Poor’s 500 Index higher for a second day, as China’s cash crunch eased. The S&P 500 climbed 0.7% to 1,599.81 at 10:15 a.m. in New York. The yield on the benchmark 10-year note fell to 2.53% from 2.61% late yesterday.

Survey Results

The median forecast of 82 economists surveyed by Bloomberg called for a 2.4% rise in GDP, the value of all goods and services produced, the same as the Commerce Department previously estimated.

Forecasts ranged from 1.6% to 2.6%. The government’s GDP estimate is the third and final for the quarter. The economy grew at a 0.4% annualized pace in the last three months of 2012.

Last quarter’s increase in consumer purchases was still the strongest in two years, and followed a 1.8% gain in the fourth quarter of 2012.

The revisions showed household spending in the category of other services, which includes tourism, legal help and personal care items such as hair cuts, dropped in the first quarter from the previous three months. Outlays on health care services grew at a slower pace than previously projected.

Income Slumps

Disposable income adjusted for inflation fell at an 8.6% annualized rate, the biggest drop since the third quarter of 2008. The decrease reflects the increase in the payroll tax.

The smaller gain in spending helped boost the saving rate to 2.5% in the first quarter, compared with an initial estimate of a 2.3%.

Businesses such as 3M Co., a St. Paul, Minnesota-based manufacturer, are among those seeing steady household demand. Consumers are spending on home improvement in addition to purchases of products such as Post-it Notes and Scotch Tape, according to 3M’s Chief Financial Officer David Meline.

“We do expect some modest improvement as we go through the year based on a view that the economy is going to continuously show some improving resilience,” Meline said at a June 12 conference.

Fiscal Policy

Sustained gains would allow the economy to better cope with the fallout from $85 billion in fiscal tightening and the lagged effect from a two percentage-point jump in the payroll tax that went into effect at the start of 2013.

Given the restraints, growth will cool to a 1.7% pace this quarter before advancing at a 2.3% in the last three months of 2013 as the fiscal headwinds fade, according to the median forecast of economists surveyed by Bloomberg this month.

Federal Reserve forecasts for growth this year and next are more optimistic than those in the Bloomberg survey. The central bank will probably taper its $85 billion in monthly bond buying later in 2013 and halt purchases around mid-2014 as long as the economy performs in line with its projections, Chairman Ben S. Bernanke told reporters on June 19 after policy makers’ two-day meeting.

Bernanke’s View

“If the incoming data support the view that the economy is able to sustain a reasonable cruising speed, we will ease the pressure on the accelerator by gradually reducing the pace of purchases,” Bernanke said at the press conference in Washington. “However, any need to consider applying the brakes by raising short-term rates is still far in the future.”

It may be a few months before it becomes clear how the economy will adapt to the volatility in the stock and bond markets generated by the prospect of a wind-down in Fed stimulus, economists said. At the same time, a recent surge in borrowing costs may slow the residential real-estate recovery rather than derail it, they said. Purchases of new homes jumped in May to a five-year high, figures showed yesterday.

“If the rise in rates continues indefinitely, that will have an effect over time,” Dean Maki, the New York-based chief U.S. economist for Barclays Plc, said before today’s report. “But for now, housing is in solid shape.”

Rising home prices are likely to keep boosting Americans’ wealth and their ability to spend. Values of existing properties in 20 U.S. cities in April posted the biggest year-over-year gain since March 2006, according to S&P/Case-Shiller data.

The automobile industry continues to be a bright spot as May sales indicated it is on course for the best year since 2007, which in turn is encouraging automakers to invest and hire. Ford Motor Co. said it is adding 2,000 workers and a third shift at its F-150 factory in Missouri to increase production of pickups beginning in the third quarter.

www.bloomberg.com

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