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.”
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.”
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