Growth Reading Slashed in Cautionary Note on Economy

Wednesday, 26 Jun 2013 11:52 AM

 

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The U.S. government slashed its estimate for first-quarter economic growth on Wednesday, offering a cautionary note on the recovery as the Federal Reserve ponders curtailing its monetary stimulus.

Gross domestic product expanded at a 1.8 percent annual rate in the quarter, the Commerce Department said in its final estimate. The economy was previously reported to have grown at a 2.4 percent pace after a near stall-speed advance of 0.4 percent in the final three months of last year.

Details of the report showed downward revisions to almost all growth categories, with the exception of home construction and government. The biggest surprise came in consumer spending, which grew at a 2.6 percent pace, not the 3.4 percent rate previously estimated.

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Economists cautioned against reading too much into the data given its backward-looking nature.

"We ended the quarter and started the year much weaker than previously thought," said Millan Mulraine, senior economist at TD Securities in New York.

"That said we still have a fairly constructive outlook. If you look at the confidence numbers, that suggests that we might be in for a fairly decent rebound in spending activity, maybe not this quarter but certainly in the months ahead."

U.S. stocks opened higher, although the data limited the gains, while prices for longer-dated U.S. government bonds rallied, with the 30-year bond rising a full point. The dollar was up modestly against a basket of currencies.

Economists polled by Reuters had expected first-quarter GDP growth would be left unrevised at 2.4 percent. When measured from the income side, the economy grew at a 2.5 percent rate, slower than the fourth-quarter's brisk 5.5 percent pace.

The downward revision to consumer spending, which accounts for more than two-thirds of U.S. economic activity, largely reflected weak outlays on health care services. Despite the downward revision, the pace of consumer spending picked up from the fourth quarter even as households faced higher taxes.

EXPORTS, BUSINESS INVESTMENT WEAK

Exports, previously reported to have grown, actually contracted at a 1.1 percent pace in the first quarter, cutting 0.15 percentage point from GDP growth. That likely reflects a slowdown in the global economy.

Business spending barely grew, with investment on nonresidential structures declining more sharply than previously reported. The drop in spending on nonresidential structures was the first in two years.

The pace of inventory accumulation was revised marginally down, adding more than half a percentage point to GDP growth. Excluding inventories, GDP grew at a 1.2 percent rate, the slowest in two years.

Fed Chairman Ben Bernanke said last week that the economy appeared strong enough for the central bank to start scaling back on its bond-buying stimulus later this year. He said the program could likely come to a close by mid-2014.

Those comments sent stocks markets tumbling around the world and pushed yields on the benchmark 10-year Treasury note up to a near two-year high.

The run-up in bond yields lifted home mortgage rates to their highest level in nearly two years last week.

Minneapolis Fed President Narayana Kocherlakota said on Wednesday the magnitude of the run-up in bond yields was a surprise.

Declassified: ‘Financial War’ Could Wipe Out 50% of Your Wealth

© 2014 Thomson/Reuters. All rights reserved.

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