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Tuesday, 2 August 2011

(BN) Consumer Spending in U.S. Unexpectedly Falls for First Time in Two Years

Bloomberg News, sent from my iPad.

Consumer Spending in U.S. Unexpectedly Falls as Hiring Slumps

Aug. 2 (Bloomberg) -- U.S. consumer spending unexpectedly dropped in June for the first time in almost two years and savings climbed, adding to evidence that the slump in hiring is hurting household confidence.

Purchases declined 0.2 percent after a 0.1 percent gain the prior month, Commerce Department figures showed today in Washington. The median estimate of 77 economists surveyed by Bloomberg News called for a 0.1 percent increase. Incomes grew at the slowest pace since November.

The lack of jobs combined with wage gains that have failed to keep pace with inflation raise the risk of further cuts in consumer spending, which accounts for 70 percent of the world's largest economy. Companies like Newell Rubbermaid Inc. are among those cutting forecasts for the year.

"Consumers ended the quarter on a pretty poor note," said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston, who projected spending would drop. "The third quarter is looking very soft too. Consumers are facing lackluster wage growth in this phase of still-high gas prices."

Stocks extended fell on mounting concern the U.S. economy was faltering. The Standard & Poor's 500 Index declined 0.3 percent to 1,282.54 at 9:47 a.m. in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 2.71 percent from 2.75 percent late yesterday.

Survey Results

Projections for spending in the Bloomberg survey ranged from an increase of 0.4 percent to a drop of 0.3 percent. The Commerce Department revised the May spending figure from a reading previously reported as being little changed.

Incomes climbed 0.1 percent in June following a 0.2 percent gain the prior month that was revised down. Economists had forecast incomes would rise 0.2 percent, according to the Bloomberg survey.

Wages and salaries were little changed, the weakest reading since November.

Americans boosted savings, a sign of growing concern over the economy and jobs. The savings rate climbed to 5.4 percent, the highest since September, from 5 percent.

Today's report showed that adjusted for inflation, which are the figures used to calculate gross domestic product, consumer spending was little changed after dropping 0.1 percent in May. The value of purchases in June was the lowest of the quarter, making a third-quarter rebound more difficult.

Inflation Stabilizes

The Federal Reserve's preferred price index, which is tied to spending patterns and excludes food and fuel, increased 1.3 percent from June 2010, the same as in the prior month.

The so-called core price index rose 0.1 percent from the prior month. The gauge was forecast to rise 0.2 percent from May, according to the survey median.

Gross domestic product climbed at a 1.3 percent annual rate from April through June after a 0.4 percent gain in the prior quarter that was less than earlier estimated, Commerce Department figures showed July 29. Household spending grew 0.1 percent, the weakest performance since the second quarter of 2009, at the end of the last recession.

A slump in confidence threatens to derail any recovery. The Thomson Reuters/University of Michigan index of consumer sentiment fell in July to the weakest reading since March 2009. The Bloomberg Consumer Comfort Index also dropped in the week ended July 24 to the lowest since May.

Stagnant Wages

"Wages are very stagnant and that's affecting consumer spending and consumer confidence," Fed Chairman Ben S. Bernanke said in semi-annual testimony to Congress on July 13. "There is also ongoing uncertainty about the durability of the recovery."

Weekly earnings adjusted for inflation dropped 0.9 percent in the 12 months ended June on average, according to figures from the Labor Department.

The labor market is still struggling to heal. The jobless rate climbed to 9.2 percent in June while payrolls grew by 18,000, the fewest in nine months. The economy also failed to create enough jobs in July to trim unemployment, economists in a Bloomberg survey said before a Labor Department report due this week.

Merck & Co., Cisco Systems Inc., and Goldman Sachs Group Inc. are among companies that announced workforce reduction plans last month.

Fuel Costs

Higher expenses for necessities like energy are also crimping purchasing power. The cost of regular gasoline climbed in May to about a three-year high of $4 a gallon, and remained above $3.70 at the end of July, according to AAA, the nation's biggest auto group.

The "difficult" U.S. economy was among reasons Newell Rubbermaid, the Atlanta-based maker of Rubbermaid containers and Sharpie pens, last week cut its full-year profit and sales forecasts.

"The consumer environment remains very tough," Michael Polk, chief executive officer, said on a conference call with analysts on July 29. "The key uncertainty is whether the consumer will show up and spend."

Auto dealers are also seeing a slump. Cars and light trucks sold at an average 11.41 annual rate in June, the slowest in a year, industry data showed. Figures for July, due today, will signal vehicle sales have stalled, according to a Bloomberg survey.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Find out more about Bloomberg for iPad: http://m.bloomberg.com/ipad/

Best Regards,

Christopher Tahir

Sent from my iPad

PS. Please forgive me for any mis-typing in the e-mail...:)

(BN) Consumer Spending in U.S. Unexpectedly Falls for First Time in Two Years

Bloomberg News, sent from my iPad.

Consumer Spending in U.S. Unexpectedly Fell as Hiring Slumped

Aug. 2 (Bloomberg) -- Consumer spending in the U.S. unexpectedly dropped in June for the first time in almost two years as a slump in hiring caused households to retrench.

Purchases decreased 0.2 percent, after a 0.1 percent gain the prior month, Commerce Department figures showed today in Washington. The median estimate of 77 economists surveyed by Bloomberg News called for a 0.1 percent increase. Incomes grew at the slowest pace since November and the savings rate climbed.

"Consumers just aren't willing to go out and spend," Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said before the report. "We are stuck in a self-fulfilling circle of slow growth leading to a poor labor market, which leads to no improvement in consumer spending and again to slow growth."

Incomes climbed 0.1 percent in June following a 0.2 percent gain the prior month that was revised down. Economists had forecast incomes would rise 0.2 percent, according to the Bloomberg survey.

Wages and salaries were little changed, the weakest reading since November.

Saving Climbs

Americans boosted savings, a sign of growing concern over the economy and jobs. The savings rate climbed to 5.4 percent, the highest since September, from 5 percent.

The Fed's preferred price index, which is tied to spending patterns and excludes food and fuel, increased 1.3 percent from June 2010, the same as in the prior month.

The so-called core price index rose 0.1 percent from the prior month. The gauge was forecast to rise 0.2 percent from May, according to the survey median.

Economic Growth

"Wages are very stagnant and that's affecting consumer spending and consumer confidence," Federal Reserve Chairman Ben S. Bernanke said in semi-annual testimony to Congress on July 13. "There is also ongoing uncertainty about the durability of the recovery."

Weekly earnings adjusted for inflation dropped 0.9 percent in the 12 months ended June on average, according to figures from the Labor Department.

Jobless Rate

Merck & Co., Cisco Systems Inc., and Goldman Sachs Group Inc. are among companies that announced workforce reduction plans last month.

The "difficult" U.S. economy was among reasons Newell Rubbermaid, the Atlanta-based maker of Rubbermaid containers and Sharpie pens, last week cut its full-year profit and sales forecasts.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Find out more about Bloomberg for iPad: http://m.bloomberg.com/ipad/

Best Regards,

Christopher Tahir

Sent from my iPad

PS. Please forgive me for any mis-typing in the e-mail...:)

(BN) Fed Policy Makers May Consider Additional Stimulus as U.S. Economy Slows

Bloomberg News, sent from my iPad.

Fed May Weigh More Stimulus on Flagging Recovery Signs

Aug. 2 (Bloomberg) -- Federal Reserve policy makers may start weighing additional steps to prop up the recovery after growth fell below 1 percent in the first half of this year and economists began cutting second-half growth forecasts.

"At a minimum, the FOMC will have a serious debate about the policy options -- what they should do, and what they expect to get from it," said Roberto Perli, a former associate director in the Fed's Division of Monetary Affairs, referring to the Federal Open Market Committee. "Growth in the first half was dangerously close to zero," said Perli, director of policy research at International Strategy & Investment Group.

The FOMC will meet Aug. 9 in Washington after the government marked down its measure of economic growth to annual rates of 0.4 percent in the first quarter and 1.3 percent in the second, casting doubt on the Fed's June outlook of 2.7 percent to 2.9 percent growth for this year. A gauge of U.S. manufacturing, a main engine for the expansion, slumped last month to the lowest level in two years.

Chairman Ben S. Bernanke said in congressional testimony in July that the Fed may take new action if the economy stalls, including beginning a third round of bond purchases. The central bank could also cut the interest rate it pays banks on excess reserves and pledge to hold its assets at a record high and interest rates at record lows for a longer period, he said.

Any effort by Bernanke to expand the Fed's $2.87 trillion balance sheet would probably meet resistance from district Fed presidents, including Philadelphia's Charles Plosser, who have said bond purchases and low borrowing costs have already pushed up long-term inflation risks too high.

Inflation Rose

During the first half of 2011, so-called core inflation rose while growth of gross domestic product slowed, even as the Fed carried out a $600 billion program in asset purchases known as quantitative easing.

The Fed's preferred inflation benchmark, the personal consumption expenditures price index minus food and energy, rose at a 2.2 percent annual rate for the three months ending May, up from 0.7 percent pace for the three months ending in January.

"Given current inflation trends, additional monetary stimulus at this juncture seems likely to raise inflation to undesirably high levels and do little to spur real growth," Richmond Fed President Jeffrey Lacker said in a speech last week. He is a voting member of the FOMC next year.

Further Cuts

Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, cut his projections for growth by a full percentage point for the current quarter and subsequent five. He expects GDP to expand 2 percent from July through September. Economists may further reduce their estimates if the Aug. 5 employment report for July shows another month of job increases below what's needed to lower the unemployment rate.

Research by James D. Hamilton, a University of California, San Diego economist, explored the idea that measures of economic activity operate differently during periods of economic growth and recession, and that an economy may hit a tipping point and move quickly from one state to another.

Jeremy Nalewaik, a Fed board staff economist, published a paper in April based partly on Hamilton's research that identified 1 percent growth or less "as a moderately useful warning sign that the economy is in danger of falling into a recession."

An expansion at that rate may hit a "stall speed," or a level of growth low enough that the economy loses its momentum and begins to shrink, he said.

Before Recession

Nine of the 11 recessions since 1945 were preceded by at least one quarter of GDP growth below 1 percent in the year before the recession began, according to Nalewaik's research.

Still, quarters of such low growth don't always herald recession. Over the time period of Nalewaik's study, 25 quarters had growth below 1 percent, with 12 of the quarters preceding a shrinking economy.

The Institute for Supply Management said yesterday that its factory index declined last month to 50.9, the lowest since July 2009, from 55.3 in June. Figures less than 50 signal a contraction.

The 10-year Treasury yield fell four basis points today to 2.71 percent as of 10:05 a.m. in London, after touching 2.69 percent, the least since November.

"The Fed will be thinking carefully about all its options," former Fed governor Randall Kroszner said in an interview yesterday.

"Certainly people will be changing their assessment to be more negative about the economic outlook and that will lead some people to suggest more needs to be done," said Kroszner, now an economist at the University of Chicago's Booth School of Business.

Can't Be Sure

Bernanke testified last month that the central bank couldn't be sure of the impact from additional easing.

"Our experience with these policies remains relatively limited, and employing them would entail potential risks and costs," he said. "Prudent planning requires that we evaluate the efficacy of these and other potential alternatives for deploying additional stimulus if conditions warrant."

The Fed's most recent stimulus backfired, said Conrad DeQuadros, senior economist at RDQ Economics LLC in New York.

"Not only did quantitative easing two not help the economy, it actually hurt it by pushing up prices and eating into real activity," he said. "Some people on the FOMC might be sympathetic to that view."

Those policy makers may also be less influential than a core group on the committee that believes high unemployment and low rates of resource use will push prices lower, DeQuadros said.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net Joshua Zumbrun in Washington at jzumbrun@bloomberg.net Jeannine Aversa in Washington at javersa@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

Find out more about Bloomberg for iPad: http://m.bloomberg.com/ipad/

Best Regards,

Christopher Tahir

Sent from my iPad

PS. Please forgive me for any mis-typing in the e-mail...:)

Sunday, 31 July 2011

(BN) Economy in U.S. Vulnerable to Relapse With GDP Short of Pre-Recession Peak

Bloomberg News, sent from my iPad.

Economy in U.S. Vulnerable With GDP Short of Pre-Recession Peak

July 30 (Bloomberg) -- The world's largest economy has yet to regain the ground it lost during the recession and may be vulnerable to a relapse.

Gross domestic product expanded at a 1.3 percent annual rate in the second quarter, after a 0.4 percent pace in the prior period, the worst six months since the recovery began in June 2009, Commerce Department figures showed yesterday. Economists said the slowdown leaves the recovery susceptible to being knocked off course by shocks at home or abroad.

"We are in a fairly risky situation," said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts, the only firm polled by Bloomberg News to correctly forecast last quarter's figure. "Growth is weak and there are some possible problems out there: our own fiscal situation, Europe's debt crisis, and there is always a risk that oil prices could shoot up."

The slow recovery left GDP at $13.27 trillion in the second quarter, below the $13.33 trillion peak of the fourth quarter of 2007, after a recession that was about 25 percent deeper than previously reported. That puts pressure on Federal Reserve policy makers to explore additional steps to boost the economy, including another round of bond purchases.

"This raises some very difficult issues for the Fed," said Julia Coronado, chief economist for North America at BNP Paribas in New York. "They will certainly have to put all options on the table and see what they can do. One more shock and we could tip over into recession."

Debt Ceiling

Congress may deliver that shock. With three days left until the Treasury Department runs out of borrowing authority, Republicans and Democrats are still at odds over what budget cuts they should make before raising the $14.3 trillion debt ceiling.

The squabbling is a "confidence hit" for both U.S. and international businesses and casts a pall over the economy in the second half, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co.

"We have signaled that we can create a crisis out of thin air," said El-Erian, whose Newport Beach, California-based Pimco runs the world's largest bond fund. "This will create a headwind to growth."

Congressional agreement on budget cuts could cause troubles of its own. Less spending by the Federal government would be "a real problem" for the economy, Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia, said in a July 29 interview on Bloomberg Television.

Recession Risk

"We could see a growing risk of recession in the fourth quarter, early 2012, if in fact the federal government gets it together and makes aggressive budget cuts," LeBas said.

Economists are lowering forecasts for second-half growth in the wake of the latest GDP numbers and the stalemate in Washington. Behravesh of IHS said growth would at best reach 2 percent this quarter and could come in as low as 1 percent. In early July, he was projecting 3.4 percent.

Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York, reduced his estimate by 1 percentage point to 2.5 percent for the third quarter, and trimmed it to 3 percent from 4.3 percent for the final three months of 2011.

Dean Maki, chief U.S. economist at Barclays Capital in New York, cut his projections by a full percentage point for this quarter and the following five. He expects GDP to grow 2 percent from July through September and 2.5 percent in the fourth quarter. Maki also wrote in a note that the Fed will keep interest rates near zero through the end of 2012.

Stocks Decline

Treasuries rallied, sending yields on 10-year notes to the lowest level this year, and stocks fell as economic growth trailed forecasts amid speculation lawmakers will reach a compromise to avoid a government default.

The yield on the benchmark 10-year note decreased to 2.79 percent at 4:21 p.m. yesterday in New York from 2.95 percent on July 28. The Standard & Poor's 500 Index fell 0.7 percent to 1,292.28.

Revisions to GDP figures going back to 2003 showed the 2007-2009 recession took a bigger bite out of the economy than previously estimated and the recovery lost momentum throughout 2010. GDP shrank 5.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the previously reported 4.1 percent drop.

Growth in the first quarter of 2011 was revised down from a 1.9 percent prior estimate, reflecting fewer inventories and more imports, the Commerce Department's report showed.

Consumers Pull Back

Much of the weakness last quarter came from a pullback in consumer spending, which accounts for about 70 percent of the economy. Household purchases rose 0.1 percent, the smallest gain since the April-June quarter of 2009. The slump reflected a 4.4 percent plunge in purchases of durable goods like automobiles.

Higher expenses for food and energy may have curtailed spending on less essential items. The cost of a gallon of regular gasoline climbed in May to about $4 a gallon, the highest in almost three years, according to AAA, the nation's biggest auto group.

The absence of faster job growth is also weighing on Americans. The unemployment rate climbed to 9.2 percent in June while payrolls grew by 18,000, the fewest in nine months, Labor Department figures showed on July 8.

Purchase, New York-based PepsiCo Inc., the world's largest snack-food maker, said profit this year will increase more slowly than it previously projected because of rising commodity costs and cooling customer demand.

"It's the consumer and competitive picture that has become more difficult than we expected," Chief Executive Officer Indra Nooyi said on a July 21 conference call.

Employment Outlook

The employment outlook remains dim. Whitehouse Station, New Jersey-based Merck & Co., the second-largest U.S. drugmaker, said yesterday that it plans to cut an additional 12,000 to 13,000 jobs by 2015. Earlier this month, announcements showed Cisco Systems Inc. will trim about 6,500 jobs worldwide; Goldman Sachs Group Inc. may reduce staff by about 1,000, and Lockheed Martin Corp. will offer a voluntary separation plan to 6,500 employees.

Other reports yesterday indicated a weaker start to the second half. Business activity cooled in July from the prior month, and consumer sentiment tumbled to the lowest reading since March 2009.

"The risk is that you've slowed down to the pace where the economy stalls," said Michael Carey, chief economist for North America at Credit Agricole CIB in New York. "Frankly, that's a bit of a scary prospect."

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net Rich Miller in Washington at rmiller28@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

Find out more about Bloomberg for iPad: http://m.bloomberg.com/ipad/

Best Regards,

Christopher Tahir