US economy cools amid shopping slowdown
By Andrew Balls
US economic growth slowed more sharply than expected in the second quarter owing to the weakest consumer spending growth for three years as high petrol prices ate into household budgets.
The US economy expanded at a 3 per cent rate in the second quarter, slowing from a revised 4.5 per cent rate in the first quarter, according to the Commerce Department's advance estimate of gross domestic product.
Economists had expected a 3.7 per cent rate of growth in the quarter. Consumer spending grew at 1 per cent, roughly half the consensus forecast, after growing above 4 per cent in the first quarter.
First-quarter GDP was revised upwards from 3.9 per cent to 4.5 per cent, meaning that the overall 3.75 per cent growth rate in the first half was in line with expectations. The Commerce Department warned that its advance estimate is based on incomplete data and is subject to substantial revisions.
While consumer spending was weak in the second quarter, other items in the report were robust. Business fixed investment rose at an 8.9 per cent rate compared with a 4.2 per cent rise in the first quarter, owing to a 10 per cent growth in spending on equipment and spending and 5.2 per cent growth in business spending on structures. Residential fixed investment rose at a strong 15.4 per cent rate and exports grew at a 13.2 per cent rate.
"Businesses are getting a little more flexible in releasing the capital investment dollars which they have been holding," said Bill Zadrozny, chief executive of Siemens Financial Services. "Companies are adding people to their workforces again and they need equipment to support them. It is starting to feed on itself".
In his recent testimony before Congress, Alan Greenspan, Federal Reserve chairman, characterised the slowdown in consumer spending in the second quarter as a "softness which should prove short-lived", owing to high energy prices.
Rising consumer confidence, a still-buoyant housing market, and stronger indications from the May data support the Fed's case that the slowdown in consumer spending in the second quarter will prove temporary. Meanwhile, the Chicago purchasing managers index of business activity, released on Friday, rebounded in July after dipping in June.
Core personal consumption expenditure excluding food and energy - the Fed's preferred measure of inflation - rose at a 1.8 per cent annual rate in the second quarter, down from a 2.1 per cent rate in the first three months of the year. However, the overall PCE index rose at a 3.3 per cent, boosted by energy prices.
Slower than expected growth and an increase in hours worked means that labour market productivity slowed in the quarter.
"We are getting back to a more traditional rise in unit labour costs at a time when other costs, including energy, are rising," said Mickey Levy, chief economist at Bank of America. "This report does not sidetrack the Fed's objective of raising interest rates in a measured way. It does raise the question of how it would deal with a continued moderate growth and rising inflation pressures."
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