Read Between All Those For-Sale Signs (NYTimes, 8/27/06)

August 27, 2006
Ideas & Trends
Read Between All Those For-Sale Signs
By DAVID LEONHARDT and VIKAS BAJAJ
REAL bubbles pop. They are fully formed one moment and gone the next. Financial bubbles rarely meet with such a definitive end, which has always been the biggest problem with the metaphor. They let out their air in unpredictable bursts, and it’s usually impossible to figure out whether they have finished deflating or are just starting to.
Still, the latest housing numbers seem like they could be a turning point. A real estate crash might not be the most likely outcome, but it certainly seems legitimate to think about what one would look like.
The number of building permits being issued is falling at a rate usually seen only in recessions. In July, 11 percent fewer existing homes were sold than were sold a year earlier; 22 percent fewer new houses were sold. After the new-house data was released last week, Capital Economics, a consulting firm, wrote an e-mail message to its clients that began, “New day, same depressing housing market story.”
The fate of the housing market will influence whether the economy will merely slow over the next year, as the Federal Reserve forecasts, or fall into a recession for the first time since early 2001. Lehman Brothers, the investment bank, said Friday that “for-sale” signs had replaced gas-price signs as the most important indicator of potential trouble.
The collapse of most bubbles does not have a single obvious starting point, like a bad corporate earnings report or an interest-rate rise. Instead, the psychology of buyers and sellers shifts, slowly at first and then sometimes in a cascade.
“It’s always mystified people about why these things turn,” said Robert J. Shiller, a Yale economist and author of “Irrational Exuberance,” a history of speculation. “People want something concrete.”
There seem to be three major paths that housing could follow over the next year: a soft landing, the start of a long slump, or a crash. A soft landing is the one predicted — and preferred — by most economists on Wall Street and at the Fed. A long slump is what many past real estate booms turned into. A crash is the outcome that a small group of analysts say is the only possible ending for the biggest housing boom of all.
Their prediction looks better than it did a few weeks ago, but even they aren’t sure whether this is the beginning of the end or another false turning point. “The funny thing about bubbles,” Mr. Shiller said, “is that you never know when they’re over.”
For a crash to happen, prices would have to decline significantly in some once-hot markets. So far, as sales have slowed and the number of houses on the market has soared, many owners have chosen to sit tight. If they were instead to decide that selling later would be even worse than selling now, this could change quickly.
The doomsayers’ strongest argument may be that too few families can afford prices in some metropolitan areas. In Las Vegas, Los Angeles and Miami, prices have almost doubled since 2003, and they have risen about 50 percent in New York and San Francisco, the National Association of Realtors says.
Jumps of this magnitude have little precedent. To afford homes, some buyers, especially in California, have resorted to aggressive mortgages, like those that allow artificially low payments in the early years. In effect, families seem to be buying houses they cannot afford, in the hope that their incomes or property values will rise significantly. “Prices just shot up too much,” said Robert T. McGee, chief economist at U.S. Trust, an investment firm based in New York. The firm has forecast a soft landing for housing, he said, but “as time goes by that starts to look like wishful thinking.”
If prices do decline, some of the first victims would be families in a financial bind that are unable to rescue themselves by refinancing their mortgage. Foreclosures would then rise, damaging banks and increasing the number of homes for sale.
Even homeowners not in danger of losing their home — an overwhelming majority, certainly — might respond to falling prices by cutting spending, particularly if they had been counting on their home’s value to serve as a retirement account. That could force job cuts in a wide range of industries.
Already, the housing slowdown has begun damaging the job market. Builders, mortgage lenders and real estate agencies have stopped adding to payrolls. Defined broadly, the real estate sector has accounted for 44 percent of jobs created since 2000 and employs more than one in 10 American workers, according to Moody’s Economy.com.
Perhaps the biggest reason to be skeptical about a real estate crash is that the country has not really suffered through one before. Not since the Depression has the combined value of residential real estate fallen over the course of a full year. Homes seem to be much less vulnerable to crashes than other assets, because people rarely sell them in a panic.
But earlier booms have been followed by modest price declines in some cities that turned into long periods in which increases trailed inflation. After peaking in much of California and the Northeast in the late 1980’s, house values fell during the recession of 1990-91 and then drifted for years, often rising more slowly than the price of milk.
In inflation-adjusted terms, prices in the New York and Washington areas did not return to their late-80’s peak until 2002. In Boston, it didn’t happen until 2000, and in San Francisco, 1999.
It isn’t hard to imagine a similar chain of events over the next decade. Based on futures contracts traded on the Chicago Mercantile Exchange, investors expect the median house price in Los Angeles, New York and some other regions to fall about 5 percent in the next year, which would be similar to the decline that started the 90’s slump.
From there, prices might start rising again, but at a slow enough pace that incomes would eventually catch up. Families that now need an exotic mortgage to buy a house in Los Angeles could eventually afford one the old-fashioned way.
Interest rates could play a role in a long slump, too. They have been falling for much of the last decade, helping push house prices higher by allowing buyers to afford bigger mortgages. Most economists expect rates to remain lower than they were a generation ago but not to return to the extremely low levels of a few years ago, making big swings in house prices, in either direction, unlikely.
Christopher J. Mayer, director of the Paul Milstein Center for Real Estate at Columbia University, argues that the recent drop in sales does not suggest that a larger bust is coming. “So far we have only seen people asking pie-in-the-sky asking prices and not getting them,” said Mr. Mayer, who expects housing to continue slowing but not enough to create a recession.
He believes that the boom in house prices was largely a result of the appeal of “superstar cities” like New York and San Francisco that are unlikely to lose their allure. In much of the rest of the country, prices are not unusually high, considering the relatively low interest rates.
Moreover, few borrowers are falling behind on their mortgage payments, and the economy looks fairly healthy outside of housing. So if prices start falling, new buyers may jump into the market and prevent any extended slump. “The fundamentals of real estate are solid, still,” said James Gillespie, chief executive of Coldwell Banker, the real estate company.
Which is it, then — a brief pause, or a big correction?
“Either argument is very compelling. I can debate myself on it,” said Mark Zandi, chief economist at Moody’s Economy.com. “That’s why there’s a great deal of uncertainty.”

A Big Star May Not a Profitable Movie Make (NYTimes, 8/28/06)

August 28, 2006
A Big Star May Not a Profitable Movie Make
By EDUARDO PORTER and GERALDINE FABRIKANT
Is Sumner M. Redstone crazy like a fox?
Movie industry executives may be forgiven for thinking that the Viacom chairman was mad to let Tom Cruise go after a 14-year relationship simply because Mr. Cruise seemed a little off balance. After all, the movies made by Viacom’s Paramount Pictures studio and the actor’s production company earned more than $2.5 billion at the box office.
Yet, if you ask economists and other academics that study the movie industry, Mr. Redstone’s decision was, in financial terms, spot on. The best reason to get rid of Mr. Cruise or, for that matter, Mel Gibson, or Lindsay Lohan, is not their occasional aberrant behavior. They, like most marquee names in Hollywood, are simply not worth the expense.
“Who knows what went through Mr. Redstone’s mind?” said Jehoshua Eliashberg, a professor of marketing, operations and information management at the Wharton School of the University of Pennsylvania. “But one can’t discard that the reason is that it doesn’t make economic sense to pay him all this money.”
Mr. Eliashberg is part of a growing cadre of academics studying how movies are made, financed and distributed. Most are finding that the studio’s assumption that big stars will increase a movie’s bottom line is simply wrong.
“There is no statistical correlation between stars and success,” said S. Abraham Ravid, a professor of economics and finance at Rutgers University, who, in a 1999 study of almost 200 films released between 1991 and 1993, found that once one considered other factors influencing the success of a film, a star had no impact on its rate of return. Employing a star had virtually no discernible impact on the box office itself. Mr. Cruise would no doubt object to that assertion. And to be fair, there is some theoretical pedigree to the idea that he may be worth every penny. In fact, there is a whole branch of economics that aims to explain how talented people generate so much more money than competitors who are only slightly less good. It’s called “superstar economics.”
Superstar economics, which has been used to explain the astonishing fees of top lawyers and the skyrocketing pay of star chief executives, dates back to the insight in the late 19th century of the British economist Alfred Marshall, who observed that “the relative fall in the incomes to be earned by moderate ability ... is accentuated by the rise in those that are obtained by many men of extraordinary ability.”
The dynamic was explained by a University of Chicago economist, Sherwin Rosen, in a 1981 paper entitled “Superstar Economics.” Mr. Rosen posited that improvements in technology that would make it easier for top performers in a field to serve a larger market would not only increase the revenue generated by stars, but would also reduce the revenue available to everybody else.
Take the National Basketball Association. Michael Jordan pulled in millions of dollars in the 1980’s and 1990’s because basketball fans from San Francisco to Milwaukee would tune in to Chicago Bulls games on TV to watch him play. In the absence of Mr. Jordan, those fans would probably have been watching the game of the Milwaukee Bucks or the Golden State Warriors instead.
In a study about ticket prices for concerts, the Princeton economist Alan B. Krueger found that between 1983 and 2003, a period in which MTV, Napster, the iPod and other technologies extended the reach of top acts, the share of concert revenue taken by the top 5 percent of artists increased to 84 percent, from 62 percent.
Hollywood, where the star system was invented, is not wholly dependent on celebrities: the list of biggest-grossing movies in history is dominated by movies like “Shrek 2,” “ET: The Extra-Terrestrial” and the “Star Wars” series, which were not star-driven. But the industry still places an enormous importance on superstar power based on a straightforward fact: On average, movies that have big names starring in them make more money at the box office than movies that do not.
Movie industry specialists argue that, in the complicated world of Hollywood economics, stars bring many different kinds of benefits. They are easier to market, they help sell more tickets at home and overseas and they help drive home-video sales, which are a bigger and bigger slice of studio revenue. “If the stars’ job is to increase output, by drawing crowds into the theaters or selling DVD’s, it is not working as well as it had worked in the past,” said Harold L. Vogel, author of a book called “Entertainment Industry Economics: A Guide for Financial Analysis.” But, he added: “This is a hiatus. We have gone through 25 years where new distribution for films — videocassettes, cable and DVD’s — added new revenue potential. That meant less resistance to stars’ salary demands.”
Even studio chiefs will acknowledge that a star does not guarantee success. “Bewitched,” starring Nicole Kidman, cost an estimated $85 million and had taken in only about $62 million at the American box office by late 2005. Yet there is a bedrock belief that the winning formula consists of the right star in the right movie.
“If you pay a star a great deal of money for a film that people don’t want to see, then it won’t work,” said Sidney Sheinberg, the former president of MCA Universal. “It is always a question of whether you are dealing with a project that is enhanced by a star or are you dealing with a project where you are looking for the star to make it happen, and sometimes it works and sometimes it doesn’t.”
Anita Elberse, an associate professor at the Harvard Business School, tried to measure the average effect of a star by analyzing casting announcements on the price of stocks on the Hollywood Exchange (www.hsx.com), a simulated market where hundreds of thousands of users trade stocks in individual movies based on their expected box-office revenue. Prices on this exchange have been found to be fairly good predictors of a film’s box-office success.
Ms. Elberse found, for instance, that the announcement in 2002 that Mr. Cruise had dropped out of “Cold Mountain” — he had been expected to play the lead — reduced the movie’s expected gross by $10 million. The announcement that Mr. Cruise was in talks to play a leading role in “The Last Samurai” lifted the movie’s expected gross by $28 million.
Combing through 12,000 casting announcements between November of 2001 and December of 2004, related to 600 movie stars and 500 movies, Ms. Elberse found stars, on average, were worth $3 million in theatrical revenue.
Still, Ms. Elberse and other academics suspect that the box-office power of movie stars might be somewhat of a mirage. Ms. Elberse found that, even when casting announcements had an impact on the expected financial outcome of a given film, they had no discernible effect on the share price of the media companies that owned the movie studio — indicating that the participation of a star had no impact on the expected profitability of the studio.
Moreover, even if a star-studded movie does well, it does not necessarily mean that the stars are causing higher ticket sales. In fact, it seems to move the other way around: stars select what they believe are promising projects. And studios prefer to put stars in movies that they expect to be a success.
“Movies with stars are successful not because of the star, but because the star chooses projects that people tend to like,” said Arthur S. De Vany, a professor emeritus of economics at the University of California, Irvine, who has written extensively about the economics of moviemaking. “It’s a movie that makes a star.”
In other words, while a person will go to a Bruce Springsteen concert because the artist is, indeed, Bruce Springsteen, the success of “The Matrix” had to do with many things other than its star, Keanu Reeves.
“Movie industry executives keep this perception that stardom is a formula for success, but they don’t measure it,” Mr. Eliashberg said. “They resist using analytical methods for all sorts of reasons, from being uncomfortable with numbers to the argument that this is a creative industry and not a business.”
Mr. De Vany and other economists point out that many factors contribute to the success of a movie — like a big budget, having a G or PG rating, opening on a large number of screens and whether it is a sequel, among others.
In one study, Mr. De Vany and W. David Walls, an economist at the University of Calgary, took those factors into account. Looking across a sample of more than 2,000 movies exhibited between 1985 and 1996, they found that only seven actors and actresses — Tom Hanks, Michelle Pfeiffer, Sandra Bullock, Jodie Foster, Jim Carrey, Barbra Streisand and Robin Williams — had a positive impact on the box office, mostly in the first few weeks of a film’s release.
In the same study, two directors, Steven Spielberg and Oliver Stone also pushed up a movie’s revenue. But Winona Ryder, Sharon Stone and Val Kilmer were associated with a smaller box-office revenue. No other star had any statistically significant impact at all. So what are stars for? By helping a movie open — attracting lots of people in to see a movie in the first few days before the buzz about whether it’s good or bad is widely known — stars can set a floor for revenues, said Mr. De Vany.
“Stars help to launch a film. They are meant as signals to create a big opening,” he said. “But they can’t make a film have legs.”
Mr. Ravid, the Rutgers professor, suggests that stars serve as insurance for executives who fear they could be fired for green-lighting a flop. “If they hire Julia Roberts and the film flops, they can say ‘Well, who knew?’ ” said Mr. Ravid.

Global Trends May Hinder Effort to Curb U.S. Inflation (NYTimes, 8/28/06)

August 28, 2006
Global Trends May Hinder Effort to Curb U.S. Inflation
By EDMUND L. ANDREWS
JACKSON HOLE, Wyo., Aug. 27 — As the Federal Reserve fiercely debates how to reduce inflation within the United States, economists are warning that trends outside the country may soon make the Fed’s job much harder.
In recent years, global integration has made things easier for the Fed in two ways. An explosion in low-cost exports from China and other countries helped keep prices of many products low even as Americans spent heavily and loaded up on debt.
At the same time, China and other relatively poor nations reversed the normal patterns of global investment by becoming net lenders to the United States and Europe. Analysts estimate that this “uphill’’ flow of money from poor nations to rich ones may have reduced long-term interest rates in the United States by 1.5 percentage points in recent years — a big difference when home mortgage rates are about 6 percent.
But as Fed officials held their annual retreat this weekend here in the Grand Tetons, a growing number of economists warned that those benign international trends could abate or even reverse.
For one thing, they said, China’s explosive rise as a low-cost manufacturer does not mean that prices will fall year after year. Indeed, China’s voracious appetite for oil and raw materials has aggravated inflation by driving up global prices for oil and many commodities.
Beyond that, new research presented this weekend suggested that the United States could not count on a continuation of cheap money from poor countries. Those flows could stop as soon as countries find ways to spend their excess savings at home.
“Medium- and long-term interest rates are set outside of the country,’’ said Kenneth S. Rogoff, a professor of economics at Harvard University and a former director of research at the International Monetary Fund. “It’s very important to think about what to do if the winds of globalization change.’’
The warnings come as the Fed’s new chairman, Ben S. Bernanke, faces widespread skepticism among economists about his forecast for a “soft landing” — a mild slowdown that will tame inflation without costing many jobs.
Inflation is already running above Mr. Bernanke’s unofficial target — 2 percent a year, excluding energy and food prices — and few analysts here say they believe the Fed will raise rates and slow growth enough to bring inflation down to its target anytime soon.
“They are in a box, and they know it,” said John H. Makin, an economist at the American Enterprise Institute and a hedge fund manger. “It’s an awkward position for them to be in.”
Economists presenting papers at the Fed retreat said that the central bank may be hindered as global trends that have kept inflation and interest rates lower than they would otherwise be turn less favorable.
The biggest change could be an increased reluctance by foreign investors to finance the United States’ huge trade gap, now more than $700 billion a year.
“What happens if foreign investors decide they don’t want to accumulate American assets any more?” asked Martin S. Feldstein, economics professor at Harvard and president of the National Bureau of Economic Research.
“Something has to change to make the debt more attractive — an increase in interest rates in the U.S. or a decline in the exchange rate of the dollar,’’ he continued. “In the short term, the Fed will face slowing output growth, possible with higher inflation.”
For the moment, bond investors appear to accept the Fed’s view that inflation will remain low. Long-term interest rates have actually edged down slightly since the Fed decided on Aug. 8 not to raise overnight rates.
But economists, including some leading bond investors, predict that inflation will creep higher even if oil prices stop climbing.
“The consensus among people here is that the Fed’s real target is not 2 percent but about 2.5 percent,’’ said David Hale, an economic forecaster in Chicago. Looking ahead 12 months, if Fed members do not make progress bringing inflation down, “it’s going to call into question their credibility,’’ he said.
Members of the Federal Open Market Committee, which sets monetary policy, appear torn. In a sign of uncertainty this weekend, Mr. Bernanke and all other senior Fed policymakers were unusually tight-lipped about any of the issues — wage trends, the ability of companies to pass higher costs on to customers, or the plunge in home sales — that are at top of their agenda.
Mr. Bernanke has been arguing that inflation will cool as annual economic growth slows to 2.5 percent, from about 3.5 percent.
But some Fed officials, worried that inflation pressures are becoming more entrenched, want to take tougher action. Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, voted against the pause in rate increases.
Michael H. Moskow, president of the Chicago Fed, strongly suggested last week that he favored higher rates and declared that the risks of higher inflation were greater than the risks of an unexpectedly sharp slowdown. Mr. Moskow is not currently a voting member of the policy committee, which rotates the regional bank presidents, but he participated in the debates.
Ethan S. Harris, chief United States economist at Lehman Brothers, said the Fed’s focus on core inflation understated the challenges posed by international shifts. The focus, he said, includes the price-lowering impact of China’s expansion but excludes the impact of higher oil prices. “They’ve included the part that makes things look better and thrown out the part that makes things look worse,” he said.
Officially, the Federal Reserve does not set explicit targets for inflation. But Mr. Bernanke, a longtime champion of inflation targets, has said that his own definition of price stability is to keep core inflation between 1 percent and 2 percent a year.
The Fed’s job is not made any easier by the upcoming midterm elections, in which Republicans are struggling to keep from losing control of both the House and Senate.
The Fed has two policy meetings, in late September and late October, before the November elections. The central bank often likes to avoid any interest rate changes immediately before an election, for fear that it will be accused of interfering on behalf of one party or another.
Regardless of what Mr. Bernanke does in the next few months, economists at the conference here said that globalization and the United States’ growing foreign debt could make his job more difficult.
Raghuram G. Rajan, the International Monetary Fund’s current head of research, presented new research to explain why many poorer countries are now net lenders to rich countries — and why they might change course. He argued that fast-growing poor countries relied less on foreign capital than many nations, and that they saved much more than they invested.
One example is Chile, the most prosperous country in Latin America. Thanks to soaring copper prices in recent years, Chile has paid off its government debt and is running a budget surplus equal to about 7 percent of its gross domestic product. Chilean leaders are putting the surplus into a long-term stability fund, part of which is invested in foreign securities, that will be used to maintain full government operations if copper prices plummet.
Mr. Rajan said many countries might not have a way to channel their excess savings because their banking systems were too underdeveloped. If so, the savings rates of those countries may decline as people become more accustomed to rising incomes and as banks find ways to rechannel savings into consumer and business loans.
Even though capital is flowing uphill to rich countries like the United States right now, Mr. Rajan said, “it doesn’t mean these flows are optimal, safe or permanent.”

Economy Slowed This Spring (NYTimes, 7/29/06)

July 29, 2006
Economy Slowed This Spring
By EDUARDO PORTER
Economic growth braked sharply in the second quarter from its blistering pace in the first, as the housing market cooled and consumer spending pulled back, slowing the economy to a more sustainable rate of expansion.
Still, the government also reported brisk inflation in the quarter, underscoring that slower growth has not yet put a check on rising prices.
The Commerce Department reported that the nation’s gross domestic product grew 2.5 percent in the second quarter, less than half the 5.6 percent expansion in the first three months of the year. The growth in consumer spending halved, while residential investment suffered its steepest decline in almost six years.
“There’s a slowdown under way,” said Steven Wieting, an economist at Citigroup Global Markets. Barring an external shock like a further spike in oil prices, he added, “a soft landing has a very high probability.”
The economic data bolstered the prices of stocks and bonds, as it raised investors’ hopes that the Federal Reserve will stop raising interest rates. The price of the 10-year Treasury bond rose, pushing its yield, which moves in the opposite direction, to 4.99 percent, below 5 percent for the first time in six weeks.
Both the Standard & Poor’s index of 500 leading stocks and the Dow Jones industrial average rose sharply, for their biggest weekly gain since November 2004.
Investors seemed to agree with the stance of the Federal Reserve and its chairman, Ben S. Bernanke, that inflation would moderate as the economy was reined in by the Fed’s string of 17 uninterrupted interest rate increases since June 2004.
Earlier this week, the Fed’s Beige Book, which records economic conditions around the country, underscored that growth in most regions moderated in the period from June through mid-July.
In testimony before Congress earlier this month, Mr. Bernanke said he expected the housing market would cool, economic growth would decelerate and unemployment would edge up, taking pressure off prices.
“A sustainable, noninflationary expansion is likely to involve a modest reduction in the growth of economic activity from the rapid pace of the last three years to a pace more consistent with the rate of increase in the nation’s underlying productive capacity,” Mr. Bernanke said. “The anticipated moderation in economic growth now seems to be under way.”
Still, despite the positive reaction in financial markets yesterday, some analysts argued that while growth may be down, inflation is still very high —and might still force the Fed to raise interest rates further. “It looks as if markets are totally setting aside the inflation data,” said Richard Moody, senior economist at PNC Financial.
The Commerce Department also reported that the core price index for personal consumer expenditures, which measures the price of consumer goods and services, excluding food and energy, surged at an annual rate of 2.9 percent in the second quarter, up from 2.1 percent in the first quarter.
At the same time, the Department of Labor reported that the employment cost index — a measure of labor costs — increased by 0.9 percent in the second quarter, up from a 0.6 percent increase in the first. The data suggested that inflation could continue to spread beyond energy through the rest of the economy, even as the economy itself slackens.
“There’s no question that this worsens the Fed’s dilemma,” said Nariman Behravesh, chief economist at Global Insight, an economic analysis firm based in Waltham, Mass. “The question is what does the Fed do as the economy slows but inflation continues to worsen.”
Growth in the last three years has been somewhat slower than the government had previously said. In its annual revision of the economic data, it said the economy grew by 3.2 percent in 2005 — not the 3.5 percent previously recorded. It also reduced measured growth in 2004 to 3.9 percent from 4.2 percent and in 2003 to 2.5 percent from 2.7 percent.
Moving forward, rising interest rates and cooling home prices are likely to be painful for many Americans. “The numbers will stop well short of a recession,” said Robert J. Barbera, chief economist at ITG/Hoenig in Rye Brook, N.Y. “Still, there will be a sectoral squeeze hitting housing and spending.”
Most economists underscored that the slowdown was broadly benign, however. Fast growth in consumer spending over the last few years, financed in great measure by mortgage refinancing and other forms of debt, has pushed the nation’s personal saving rate into negative territory and helped fuel the enormous trade deficit.
Just as housing spurred consumer spending as home prices rose, the slowing housing market put the brakes on consumers buying power, helping slow the growth of personal consumer expenditures to 2.5 percent in the second quarter, down from 4.8 percent in the first.
Consumer spending on durable goods fell by 0.5 percent, driven by declining car sales. Residential investment also declined by 6.3 percent, shaving 0.4 percent off output growth, following declines of 0.3 percent in the first quarter and 0.9 percent in the fourth quarter of last year.
And the decline has barely started. Michael Carliner, vice president for economics at the National Association of Home Builders, pointed out that there was still a lot of building in the pipeline from 2005, which was a record year for single-family housing starts. When that is gone, residential construction could decline more sharply.
“Residential investment is not going to carry the load it has been carrying the past few years,” Mr. Carliner said. “Business investment should pick up the slack.”
Yet the one big surprise in the second quarter was the sluggishness of business investment, which grew by a mere 2.7 percent, down from a 13.7 percent increase in the first quarter of the year as purchases of software and other equipment fell unexpectedly for the first time in more than three years.
Trade contributed 0.33 percentage points to economic growth, for the first time in a year, as export growth outpaced growth in imports. Inventory accumulation also contributed 0.4 percentage points.
Economists said corporate spending should recover. “I don’t think this indicates a decline is coming in business investment, but it means that its rate of growth will slow,” said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, a business research group in Arlington, Va. “We won’t see double digits but high single digits.”