US economy: Consumer spending bolsters second-quarter growth

WASHINGTON -  U.S. economic growth accelerated in the second quarter as solid consumer spending offset the drag from weak business spending on equipment, suggesting a steady momentum that could bring the Federal Reserve closer to hiking interest rates this year.

Gross domestic product expanded at a 2.3 percent annual rate, the Commerce Department said on Thursday. First-quarter GDP, previously reported to have shrunk at a 0.2 percent pace, was revised up to show it rising at a 0.6 percent rate.

The revision to first-quarter growth reflected steps taken by the government to refine the seasonal adjustment for some components of GDP, which economists said left residual seasonality in the data, as well as new source data.

The Fed on Wednesday described the economy as expanding "moderately" while upgrading its view of the labor market and saying housing had shown "additional" improvement. The Fed's assessment left the door open for a possible hike in interest rates in September, which would be the first rise since 2006.

A separate report showed first-time applications for state unemployment benefits increased 12,000 last week to a seasonally adjusted 267,000. However, claims remained not too far from their cycle lows.

The dollar extended gains against a basket of currencies, while prices for U.S. Treasury debt fell slightly.

Though second-quarter GDP growth was a bit below economists' expectations for a 2.6 percent rate, the growth composition pointed to firming domestic fundamentals.

A measure of private domestic demand, which excludes trade, inventories and government expenditures, increased at a 2.5 percent rate after rising at a 2.0 percent pace at the start of the year.

Growth in the second quarter was boosted by consumer spending as households used some of the windfall from cheaper gasoline in late 2014 and early this year to go shopping. The strengthening labor market also encouraged consumers to loosen their purse strings.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 2.9 percent rate from a downwardly revised 1.8 percent pace in the first quarter. Consumer spending was previously reported to have increased at a 2.1 percent rate at the start of the year.

The saving rate fell to 4.8 percent from 5.2 percent.

ENERGY DRAG PERSISTS

Housing also supported the economy in the second quarter, as did exports, and state and local government spending.

However, the energy sector continued to weigh on growth as it struggles with the lingering effects of deep spending cuts by oil-field companies like Schlumberger (SLB.N) and Halliburton (HAL.N) in the aftermath of a more than 60 percent plunge in crude oil prices last year.

Business spending on structures fell at a 1.6 percent rate after stumbling 7.4 percent at the start of the year. Investment on equipment fell at a 4.1 percent rate.

Spending on mining exploration, wells and shafts plunged at a 68.2 percent rate, the largest decline since the second quarter of 1986. This category dropped at a 44.5 percent pace in the first quarter.

But there are signs that the energy spending rout might be nearing an end. Data last Friday showed U.S. energy firms added 21 oil rigs last week, marking the third increase over the past 33 weeks.

Schlumberger said last week it believed the North American rig count may be bottoming and that a slow rise in both land drilling and completion activity could occur in the second half of the year.

Exports rebounded in the second quarter, despite a strong dollar, while imports rose moderately. That left a smaller trade deficit that added 0.13 percentage point to GDP growth.

Inventory investment slowed after the first quarter's brisk pace. Businesses accumulated $110.0 billion worth of merchandise, down from $112.8 billion in the first quarter, good news for the remainder of the year.

With oil prices rising during the second quarter and consumer spending picking up, inflation accelerated sharply.

The personal consumption expenditures price index rebounded at a 2.2 percent rate, the fastest since the first quarter of 2012, after falling at a 1.9 percent rate at the start of the year. Excluding food and energy, prices increased at a 1.8 percent pace.  — Reuters

As Europe struggles, companies focus on cost cuts

DAGENHAM, England - Glistening chains on the turnstyles at Ford Motor Co.'s plant in east London illustrate how, even when companies unveil positive news about their European operations, it may not mean things are picking up in the economy.

Ford told investors this week that its European operation was performing better than expected and that its turnaround on this side of the Atlantic was on track.

But this recovery is largely premised on cutting costs, with demand for vehicles still falling across the continent and the industry facing overcapacity.

"The outlook for the business environment in Europe continues to be uncertain," Bob Shanks, the U.S. automaker's chief financial officer, told analysts on Wednesday.

A day later work stopped at the 750-strong Dagenham plant, which made bonnets and doors for Transit vans, and workmen lowered white concrete barriers across the entrances to employee car parks—all part of Ford's plan to create a "more efficient manufacturing footprint" in Europe.

Aggressive cost-cutting in Europe contributed to the better-than-expected second-quarter profit General Motors Co reported on Thursday.

Other sectors are also cutting back. Kimberly Clark shut a Spanish factory after the company decided to stop selling its Huggy diapers in most European markets and exit other businesses on the continent.

U.S. advertising group Interpublic, supermarket chain Carrefour, electrical goods makers Indesit and staffing group Randstad were among the companies which told investors in the past fortnight that weak European demand was forcing them to cut costs and jobs.

"Whatever earnings growth is coming is base-line activity or cost cutting. Capex [capital expenditure] is where companies are saving money, trying to keep the bottom line healthy," said Chris Weafer, senior partner with consultancy Macro-Advisory.

Recent economic data has suggested the euro zone is starting to turn a corner and Britain looks definitively to be back on a growth path.

Those improvements in leading indicators have prompted institutional investors to look at Europe with new interest.

With stock markets in Japan and the United States posting double-digit gains so far this year, investors may have squeezed as much as they can out of a recovery story there and are looking for the euro zone and Britain to pick up the growth baton.

But it will take more than the first tips of green shoots to persuade companies to invest heavily once more.

Chicken and egg

Investment plummeted after the financial crisis, with the euro zone business investment rate in the last quarter of 2012, the most recent period for which figures are available, at its second-lowest level since 2001.

The widespread focus among executives on scaling back, and the dearth of plans to spend more, highlighted how Europe was not out of the woods yet, despite some recent positive signs from Eurozone Purchasing Managers' surveys last week, said Yiannis Koutelidakis, economist at Fathom Consulting.

The absence of spending from companies is contributing to a chicken and egg situation, delaying the recovery that might prompt them to spend more.

"The lack of investment and the continued government austerity, is definitely a drag on the outlook," said Bert Colijn, economist at the Conference Board, a research organization.

"If we see a recovery in Europe in the second half of the year, which is something that is becoming more realistic, that recovery will be very slow."

Some businesses said predictions of recovery in the second half of 2013 were optimistic. Marco Milani, Chief Executive of Italy's Indesit, said he wasn't confident of recovery in 2014 and consequently was cutting back investment and shifting manufacturing out of Europe.

In June, the company published a plan that envisaged cutting its Italian workforce by a third and moving some operations to emerging markets, including Turkey.

Economists say these kinds of actions pose long-term risks for Europe, because even when demand recovers, it will increasingly be served from outside the continent.

"The crisis will leave structural scars on the economy," Koutelidakis said.

Corporate belt-tightening could even be accelerated if the United States starts withdrawing monetary stimulus, as Federal Reserve Chairman Ben Bernanke has indicated it might. Such a move could raise borrowing costs for European businesses, further eating away at profits and discouraging investment.

Not all companies are reporting falling sales in Europe.

Home-appliance manufacturers Whirlpool Corp and Electrolux AB forecast a rebound in demand from Europe, suggesting consumer confidence may be returning.

It would be natural for consumer spending to pick up before capital investment.

"While southern Europe continues to lag, there are some positive trends in Germany, the Nordics in particular and the UK," Electrolux Chief Executive Keith McLoughlin told Reuters.

But even in some cases where companies reported strong European demand and plans to increase hiring to meet it, they retained an air of caution.

Swedish truckmaker Volvo reported healthy sales and said it was increasing production in Europe to help deal with a growing order backlog.

Yet Chief Executive Olof Persson told analysts on Wednesday that Volvo, which makes trucks under brands such as Renault and Mack as well as its own name, would take on temporary workers to raise output, rather than commit to taking on new full time employees.

"This production ramp up has been done with temporary workers. And this is what we're going to focus on very much going forward ... in order to be more agile in adapting to whatever comes ahead of us," Persson said. —Reuters

source: gmanetwork.com

U.S. consumer inflation stabilizing, industrial output up

WASHINGTON - U.S. consumer prices accelerated in June and underlying inflation pressures showed signs of stabilizing, keeping on track expectations the Federal Reserve will start tapering its bond purchases later this year.
   
Other data on Tuesday showed industrial production pushed higher in June as manufacturing output found some momentum, raising hope a recent slowdown in factory activity was either over or close to running its course.
   
The Labor Department said its Consumer Price Index increased 0.5 percent, the largest rise since February, after nudging up 0.1 percent in May. Gasoline prices accounted for about two thirds of the increase in the CPI.
   
Economists polled by Reuters had expected consumer inflation to increase 0.3 percent last month.
   
In the 12 months through June, consumer prices advanced 1.8 percent after rising 1.4 percent in May. It was also the largest increase since February.
   
Stripping out volatile energy and food, consumer prices increased 0.2 percent for a second straight month. That took the increase over the 12 months to June to 1.6 percent, the smallest increase since June 2011. The so-called core CPI had increased 1.7 percent in May.
   
While both inflation measures remain below the Federal Reserve's 2 percent target, details of the report suggested the recent disinflation trend was fading, with medical care costs rising. Prices for new motor vehicles, apparel and household furnishings also increased.
   
Fed Chairman Ben Bernanke, who last month said the central bank would start cutting back the $85 billion in bonds it is purchasing each month to keep borrowing costs low, has viewed the low inflation as temporary and expects prices to push higher.
   
Alan Ruskin, an analyst at Deutsche Bank in New York, said the report should "counter arguments that there is a material deflation risk."
   
In a separate report, the Fed said output at the nation's factories, mines and utilities rose 0.3 percent last month after a flat reading in May. The increase reflected a 0.3 percent rise in manufacturing output.
  
Economists said it suggested some pickup in economic activity at the end of the second-quarter.
  
"If manufacturing growth is on the verge of accelerating into the second half of the year, this, along with solid gains in housing, should support growth in the second half of 2013," said John Ryding, chief economist at RDQ Economics in New York.
   
Prices creeping up
   
Tepid economic growth has been keeping a lid on inflation pressures. While some pockets of pricing power are starting to gradually emerge, there is no consensus on whether this trend will hold, given still-high unemployment.
   
Last month, gasoline prices soared 6.3 percent after being flat in May. June's increase in the cost of gasoline was the largest since February. When unadjusted for seasonal fluctuations, gasoline prices rose only 0.6 percent.
   
Food prices increased 0.2 percent after slipping 0.1 percent the prior month.
   
Overall housing costs maintained their steady rise, with owners' equivalent rent - which accounts for about a third of the core CPI - increasing 0.2 percent after a similar gain in  May.
   
Medical care services rose 0.4 percent after being flat in May, while medical care commodities rebounded 0.5 percent as the cost of prescription drugs increased. Medical care commodities had dropped 0.5 percent the previous month.
   
Weak medical care costs have been the one of the key contributors to the low inflation rate.
   
Economists cite a host of reasons for the downward pressure on health costs, ranging from the expiration of patents on a number of popular prescription drugs to government spending cuts that are reducing payments to doctors and hospitals for Medicare.
   
"It's unclear we have seen all the medical care softness or we might see softness later this year from the effect of sequester," said Laura Rosner, an economist at BNP Paribas in New York.
   
Apparel prices pushed up 0.9 percent, the largest increase since August 2011, after edging up 0.2 percent in May.

New motor vehicle prices increased 0.3 percent. They had been flat in May. Prices for used cars and trucks fell for a second straight month. — Reuters

source: gmanetwork.com