Growth picks up in sign U.S. overcoming hurdles

Government Spending

Today’s report also showed government spending fell at a 0.4% annualized rate, reflecting cutbacks in non-defense outlays. Another round of fiscal tightening started taking effect in March with the $85 billion in automatic across-the- board federal spending cuts known as sequestration.

“The outlook for the second half is that growth gets stronger as the fiscal drag fades,” said Harm Bandholz, chief U.S. economist at UniCredit Group in New York, who predicted 1.8% growth. “The consumer is looking resilient, though a bit weaker.”

The GDP report also showed price pressures slackened. A measure of inflation, which is tied to consumer spending was unchanged in the second quarter, the weakest performance since 2009. Fed policy makers aim for increases of 2%.

Corporate spending on equipment climbed at a 4.1% annualized pace. American factories received more orders for automobiles and machinery in June, pointing to a pickup in manufacturing, Commerce Department data last week showed. Bookings for goods meant to last at least three years rose 4.2%, three times the median forecast of economists surveyed by Bloomberg.

Trade Deficit

Today’s report also showed the trade deficit widened as imports climbed faster than exports, subtracting 0.8 percentage point from GDP growth, a sign the U.S. economy is performing better than its counterparts.

Gains in hiring and record household wealth, in large part driven by rising stock prices and home values, will support sentiment and allow Americans to sustain spending. The Bloomberg Consumer Comfort Index matched its highest level in more than five years during the week ended July 21.

Purchases of big-ticket items such as automobiles remain a bright spot. Cars and light trucks sold at a 15.9 million annualized rate in June, the strongest since November 2007, according to figures from Ward’s Automotive Group.

Home Values

The real-estate market also continues to strengthen as historically low borrowing costs drive demand and lift prices, indicating homebuilding may keep advancing. The S&P/Case-Shiller index of house values in 20 cities climbed 12.2% in May from a year earlier, the biggest 12-month gain since March 2006, a report showed yesterday.

United Technologies Corp., the maker of Carrier air conditioners, Pratt & Whitney jet engines and Otis elevators, is among companies citing gains in auto sales and housing starts as reasons to expect an improvement in coming quarters.

“The economy is recovering and we are seeing strength in the leading sectors,” Gregory Hayes, chief financial officer at the Hartford, Connecticut-based company, said on a July 23 earnings call. “Talk about economic uncertainty remains, but overall, our orders position us well for growth in the second half of the year.”

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