November 27, 2020

U.S. First-Quarter Growth Cut to 1.8 Percent

Economists cautioned against reading too much into the data given its backward-looking nature, but said it could weigh on the Federal Reserve as it considers whether the economy is strong enough for it to start scaling back its monetary stimulus.

Gross domestic product expanded at a 1.8 percent annual rate, the Commerce Department said in its final estimate on Wednesday. Output was previously reported to have risen at a 2.4 percent pace after a 0.4 percent stall speed in the fourth quarter.

Details of the report, which showed downward revisions to almost all growth categories, with the exception of home construction and government, could cast a shadow over the Fed’s fairly upbeat assessment of the economy last week.

“This gives (the market) hopes that the Fed won’t be tapering as aggressively,” said Craig Dismuke, chief economic strategist at Vining Sparks in Memphis, Tennessee.

Financial market conditions are tightening after Fed Chairman Ben Bernanke said last week the U.S. central bank would likely begin to slow the pace of its bond-buying stimulus later this year and stop the program in 2014.

Economists fear that could undercut growth, which has recently shown signs of picking up.

U.S. stock index futures pared gains on the report, while prices for longer-dated U.S. government bonds rallied, with the 30-year bond rising a full point. The dollar fell against the euro but gained against the yen.

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.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.6 percent pace rather than 3.4 percent. The revision largely reflected weak outlays on health care services.

Consumer spending grew at a 1.8 percent rate in the fourth quarter of last year.

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.

(Reporting by Lucia Mutikani; Additional reporting by Richarc Leong in New York; Editing by Andrea Ricci)

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Fed Sees Boost From Housing Rebound and Auto Sales

WASHINGTON (AP) — A strengthening housing recovery and robust auto sales contributed to moderate economic growth across the United States in late February and March, according to a Federal Reserve survey released Wednesday.

Growth was moderate or modest in all of the Fed’s 12 banking districts, and it accelerated in two — New York and Dallas — from January and early February.

The survey suggested that the economy performed better in March than some government data on hiring and consumer spending had indicated. That could mean the economic weakness might have been temporary.

The Fed survey, which is based on anecdotal reports, found that hiring was unchanged or improved slightly compared with the previous report. And it noted that consumer spending — which drives most of the economy — grew modestly. But the report also said higher taxes and a spike in gas prices had slowed sales.

By contrast, the Labor Department said earlier this month that job growth slowed sharply in March. And retail sales declined in March by the most in nine months, a separate report said last week.

Dana Saporta, an economist at Credit Suisse, said the survey “is consistent with the larger picture of steady if unspectacular growth.”

“We get caught up in the monthly volatility of the data, and we need to step back,” she said.

Zach Pandl, an economist at Columbia Management, an investment firm, said the survey’s rosier tone is probably one reason that several Fed policymakers have recently expressed optimism despite sluggish economic data.

The Fed survey said the recovery in home construction is gaining momentum and creating more construction jobs. It’s also boosting factory output of housing-related goods, such as lumber.

The report did note some weak spots. Several districts said manufacturers of defense-related goods had cut jobs in response to government spending cuts that started taking effect March 1.

Still, it said that growth overall was moderate, an upgrade from the “modest to moderate” pace in the previous two reports.

The Fed report, called the Beige Book, provides an overview of economic conditions from Feb. 22 through April 5. The information will be discussed along with other economic data during the Fed’s next policy meeting April 30-May 1.

At that meeting, most analysts expect the Fed to maintain its low interest rate policies but take no new steps. The Fed is expected to stick with its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent. And it will likely continue buying $85 billion a month in Treasury and mortgage bonds to try to keep long-term rates low and encourage borrowing, spending and investing.

Debate has heated up among Fed policymakers about when to start curtailing the bond-buying program, which began last fall. At their last meeting March 19-20, a majority of Fed officials said they favored continuing the bond purchases at least through the middle of this year. But many members indicated that they want to start winding down the program before year’s end, as long as hiring and the economy continued to improve.

Since that meeting, some government reports had suggested that the economy weakened in March. Employers added only 88,000 jobs in March, a sharp slowdown from average gains of 220,000 in November through February. And consumers cut back on spending at retail stores and restaurants last month, a sign that higher Social Security taxes might have made more Americans cautious about spending.

Still, reports on housing and autos continue to signal strength. In March, builders broke the 1 million mark on homes started for the first time since June 2008. The increase in the seasonally adjusted annual rate for March was fueled by a surge in apartment construction.

And U.S. auto sales rose to 1.45 million in March, their highest level since August 2007. Car sales fell slightly from last March, but pickup sales jumped 14 percent.

Economists forecast that the economy grew at a 3 percent annual rate in the January-March quarter, a healthy rebound from a scant 0.4 percent increase in the fourth quarter. But most now think growth will slow sharply to about 1.5 percent in the April-June quarter.

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Pace of Home Building Rose at Vigorous Clip in February

The Commerce Department said on Tuesday that builders broke ground on houses and apartments last month at a seasonally adjusted annual rate of 917,000. That rate was 910,000 in January. February’s pace was the second-fastest since June 2008, behind December’s rate of 982,000.

Single-family home construction increased to an annual rate of 618,000, the most in four and half years. Apartment construction also ticked up, to 285,000.

The gains are likely to grow even faster in the coming months. Building permits, a sign of future construction, increased 4.6 percent to 946,000. That was also the most since June 2008, just a few months into the recession.

The figures for January and December were also revised upward. Housing starts have risen 28 percent over the last 12 months.

Separately, a private report showed that the number of Americans with equity in their homes increased last year. That suggested that one of the biggest drags from the housing crisis was easing, and it could clear the way for more people to put homes on the market.

“The road ahead for housing is still, so far, looking promising,” Jennifer Lee, an economist at BMO Capital Markets, said in a note to clients.

The housing market is recovering after stagnating for roughly five years. Steady job gains and near-record-low mortgage rates have encouraged more people to buy.

Still, the supply of available homes for sale remained low. That has helped push up home prices. They rose nearly 10 percent in January compared with 12 months earlier, according to CoreLogic, a research firm, the biggest increase in nearly seven years.

Higher prices mean more Americans have equity in their homes. Last year, about 1.7 million Americans went from owing more on their mortgages than their homes were worth to having some ownership stake, CoreLogic reported on Tuesday. Still, 10.4 million households, or 21.5 percent of those with a mortgage, remain “under water,” or owe more on their home than it is worth.

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Production Slowed At Factories In October

But companies ordered more goods, factories slashed their stockpiles and auto sales rose. Those trends suggest manufacturing activity could rebound in the coming months.

The data, which also showed a slight uptick in construction spending in September, points to an economy that is growing but remains too sluggish to lower the unemployment rate, which has been stuck at 9.1 percent for three consecutive months.

The Institute for Supply Management said Tuesday that its manufacturing index dropped to 50.8, down from 51.6 in September. Any reading above 50 indicates expansion.

Measures of production and new export orders fell. A gauge of employment dipped but remained strong enough to signal that factories were adding workers.

“Over all, economic conditions seem just about strong enough to avoid a recession, but not strong enough to generate any meaningful growth,” said Paul Dales, senior United States economist at Capital Economics.

Separately, the Commerce Department said builders spent slightly more in September on projects, the second consecutive monthly increase. A gain in spending on home construction offset declines in government projects. Still, the annual rate of spending is approximately half the $1.5 trillion that economists consider healthy.

A report in China showed that manufacturing grew at the slowest pace in nearly three years in October, partly because of weak export orders.

“Manufacturing is feeling a chill wind from a generally weaker global economic environment, and this is unlikely to change anytime soon,” said Joshua Shapiro, chief United States economist at MFR Inc.

Factories were among the first businesses to start growing after the recession officially ended in June 2009. The manufacturing sector has grown for 27 straight months, according to the index.

Despite slower growth in American manufacturing, economists were encouraged by details in the I.S.M. report, released by a trade group of purchasing managers.

An index measuring new orders rose to 52.4, the first time it has topped 50 in four months and the highest reading in six months.

Manufacturers also said their stockpiles fell sharply. That means that factories will have to increase output to meet any increase in demand.

And the prices that manufacturers paid for raw materials fell sharply, indicating that inflation pressures are dissipating. The prices index plummeted from 56 to 41, the lowest point since April 2009.

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Economix: What Caused Job Losses

Today's Economist

Casey B. Mulligan is an economics professor at the University of Chicago.

Census Bureau data on employment by pay level cast doubt on credit-crunch and demand-based theories of the recession. One theory is that a credit squeeze left businesses short on funds, and they responded by cutting payroll, their major expense. Indeed, the bank bailouts were rationalized on the grounds that a bailout would help employers maintain their payrolls.

If cutting payroll spending had been the primary motivation of employers, then they should have cut deepest among their most expensive employees. Firing one person making, say, $2,000 a week saves more than firing three people making $600 a week.

It is true that part-time employment, which is typically low-paying, increased significantly during the recession. However, last week I showed Census data suggesting that employment of people making more than $2,000 a week may have been greater in the 12 months after Lehman Brothers failed than it was before, even while employment of people making less than $2,000 a week fell several million.

Hiring more high-paid people is not a way to reduce payroll spending.
Moreover, payroll spending now exceeds what it was when the recession began, yet employment remains millions lower. Apparently, payroll spending is not enough to bring those jobs back.

Another theory of the recession is that it was caused by a lack of demand — fewer employees were needed because employers were selling less to their customers. The low-demand theory is a good description of a couple of industries, like manufacturing and home construction, but if it described the economy as a whole we would have seen all types of employment cut, not just employment of people making less than $2,000 a week.

Another set of theories say that high-paid employees are replacing low- and middle-income employees. This replacement might come from employers’ attempts to cut personnel during the recession, rather than payroll spending. For example, employers might have worried about health insurance and other employment regulation whose costs are proportional to the number of employees they have. In this view, the bank bailout did little to prevent layoffs.

Some of the replacement could come from families, as they react to some new incentives presented during the recession. Unemployment insurance reduces incentives for unemployed people to accept a new job, because, for up to 99 weeks, the insurance pays them for being unemployed.

Unemployment insurance benefits are capped, so the disincentive is much less for people making $2,000 or more a week than for people making less. Some homeowners with underwater mortgages may react by earning more, while others earn less as they recognize that all their extra earning ultimately ends up with their mortgage lender.

The chart below explores the replacement theories further.


For each of the 50 states and the District of Columbia, the chart compares the percentage change in the fraction of adults in the state who make $300-1,200 a week (the middle two-thirds of employees are paid in that range) to the percentage change in the fraction making $2,000 or more.

For example, the fraction of Arizona adults earning $300-1,200 was 10 percent lower from October 2008 to September 2009 than it was in the previous 12 months, and the fraction of Arizona adults earning more than $2,000 a week was 29 percent higher.

The low-demand and payroll-cutting theories say that the two should be positively correlated, because the states with the largest demand reductions (or the employers most motivated to cut payroll spending) would have cut employment across the board.

But the Census data suggest that they are negatively correlated (the correlation is also negative if the small or “outlier” states shown in the chart are excluded or downweighted according to population).

These patterns of employment by pay level reveal a number of insights that are not visible in the aggregate employment statistics: the credit crunch and lack of demand may have received too much of the blame for the recession’s job losses.

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U.S. Housing Construction Rose 7.2% in March

Builders broke ground last month on the most new homes in six months, giving the weak housing market a slight lift.

The Commerce Department said on Tuesday that home construction rose 7.2 percent in March from February to a seasonally adjusted 549,000 units a year. Building permits, an indicator of future construction, rose 11.2 percent after hitting a five-decade low in February.

Still, the building pace is far below the 1.2 million units a year that economists consider healthy. And March’s improvement came after construction fell in February to its second-lowest level on records dating back more than a half-century.

Millions of foreclosures have forced home prices down. In some cities, prices are half of what they were before the housing market collapsed in 2006 and 2007. And more foreclosures are expected this year. Tight credit has made mortgage loans difficult to get, and many would-be buyers who could qualify for loans are reluctant to shop, fearing that prices will fall even further.

A sign of the battered industry is the number of new homes finished and ready to sell dropped in March to a seasonally adjusted 509,000 units, the lowest level on records dating back to 1968. And the number of homes now under construction has fallen to a four-decade low.

Single-family homes, which make up roughly 80 percent of home construction, rose 7.7 percent in March. Apartment and condominium construction rose 14.7 percent. Building permits increased to the highest level since December, spurred by a more than 28 percent jump in permits granted for apartment and condo buildings.

The increase in home construction activity was felt in most regions of the country. It rose 32.3 percent in the Midwest, 27.6 percent in the West and 5.4 percent in the Northeast. Construction fell 3.3 percent in the South.

The National Association of Home Builders, the trade group, said Monday that its index of industry sentiment for April fell one notch, to 16. That followed a one-point increase in March and four months of 16 readings. Any reading below 50 indicates negative sentiment about the housing market’s future; the index has not been above that level since April 2006.

Most economists expect home prices — and by extension home sales and construction — to slip even further in 2011 before a modest recovery takes hold.

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