US con­sumers, for­eign trade curb sec­ond quar­ter growth

The Pak Banker - - COMPANIES/BOSS -

US eco­nomic growth slowed in the sec­ond quar­ter as con­sumers spent at their slow­est pace in a year, in­creas­ing pres­sure on the Fed­eral Re­serve to do more to bol­ster the re­cov­ery.

Gross do­mes­tic prod­uct ex­panded at a 1.5 per­cent an­nual rate be­tween April and June, the weak­est pace of growth since the third quar­ter of 2011, the Com­merce Depart­ment said on Fri­day. First-quar­ter growth was re­vised up by a tenth of a per­cent to a 2.0 per­cent pace.

De­tails of the re­port were weak, with for­eign trade be­ing a drag and stocks of un­sold goods ris­ing. That, to­gether with signs that ac­tiv­ity slowed fur­ther early in the third quar­ter strength­ens the ar­gu­ment for the Fed to of­fer the econ­omy ad­di­tional stim­u­lus at its Septem­ber meet­ing.

"The econ­omy has lost al­ti­tude and fly­ing pretty close to stall speed. Mon­e­tary pol­icy is the only game in town and ad­di­tional eas­ing is highly likely," said Sung Won Sohn, an eco­nom­ics pro­fes­sor at Cal­i­for­nia State Univer­sity Chan­nel Is­lands in Ca­mar­illo, Cal­i­for­nia. The ail­ing econ­omy could cost Pres­i­dent Barack Obama a sec­ond term in of­fice when Amer­i­cans vote in Novem­ber. Obama's ap­proval rat­ing on his han­dling of the econ­omy is slip­ping.

A poll pub­lished last week showed 36 per­cent of reg­is­tered vot­ers be­lieve Repub­li­can can­di­date Mitt Rom­ney has a bet­ter plan for the econ­omy, com­pared to 31 per­cent who had faith in Obama's poli­cies. In a nod to the dark­en­ing eco­nomic out­look, the White House on Fri­day cut its growth es­ti­mate for this year to 2.3 per­cent from 2.7 per­cent back in Fe­bru­ary. The growth forecast for 2013 was pared to 2.7 per­cent from 3.0 per­cent.

The econ­omy's ex­pan­sion fol­low­ing the 2007-09 re­ces­sion is the slow­est since the 1980-81 pe­riod and the re­ces­sion it­self was the deep­est in the post-war pe­riod. No ma­jor pol­icy an­nounce­ment is ex­pected at the Fed's two-day meet­ing next week, but many econ­o­mists now say the cen­tral bank could launch a third round of bond pur­chases, also known as quan­ti­ta­tive eas­ing, when pol­i­cy­mak­ers gather on Septem­ber 12-13.

How­ever, there is a chance the Fed could push fur­ther into the fu­ture its con­di­tional pledge to keep rates near zero through late 2014, econ­o­mists said. The U.S. cen­tral bank has al­ready in­jected $2.3 tril­lion into the econ­omy through as­set pur­chases and slashed overnight in­ter­est rates to near zero. But not all econ­o­mists be­lieve the Fed will pump more money into the econ­omy in Septem­ber, ar­gu­ing that the slow­down in growth was not a suf­fi­cient con­di­tion on its own.

They said the Fed would want to save its lim­ited ar­se­nal for a real cri­sis. "The Fed will pull the trig­ger on QE3 if the sense is we are get­ting into trou­ble, but if we are just weak and some­what limp­ing for­ward, they will pre­fer to stay pat," said Adolfo Lau­renti, a se­nior economist at Me­sirow Fi­nan­cial in Chicago.

"They do not want to use what­ever am­mu­ni­tion they have left too soon, they want to keep some just be­cause things might get even worse later on." The econ­omy has been hit by wor­ries of deep gov­ern­ment spend­ing cuts and higher taxes sched­uled to kick in at the start of 2013, as well as trou­bles from the debt cri­sis in Europe.

The big­gest fac­tor weigh­ing on the re­cov­ery is fear that politi­cians in Washington will be un­able to avoid the so­called fis­cal cliff at the turn of the year, econ­o­mists said. Third-quar­ter growth is forecast at a rate be­tween 1 and 1.5 per­cent. Ex­pec­ta­tions of fur­ther mon­e­tary stim­u­lus fu­eled a rally on Wall Street, with the Dow Jones in­dus­trial av­er­age clos­ing above 13,000 for the first time since May 7. The Stan­dard & Poor's 500 in­dex touched its high­est level in nearly three months.

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