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Consumer Spending Bolsters U.S. Second-Quarter Growth

Consumer Spending Bolsters U.S. Second-Quarter Growth

By Lucia Mutikani

WASHINGTON (Reuters) — 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 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 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.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

Photo: A customer shops at the Wal-Mart Neighborhood Market in Bentonville, Arkansas, June 4, 2015. REUTERS/Rick Wilking

Fed Rejects 5 Banks’ Capital Plans, Including Citigroup

Fed Rejects 5 Banks’ Capital Plans, Including Citigroup

Washington (AFP) – The Federal Reserve approved the capital plans of 25 major U.S. banks after stress tests Wednesday, but turned down those of five others, including Citigroup’s.

The Fed said four of the five — Citi, HSBC North America, RBS Citizens Financial and Santander Holdings USA — had “qualitative” shortfalls in their capital foundations, while the fifth, Zions Bancorp, had failed the stress test with its basic capital ratio falling under the minimum.

The objection means the five cannot move ahead with any increase in capital distributions — dividend payments, share buybacks and other moves — without strengthening their capital foundations to Fed standards.

These bank holding companies (BHCs) “are not permitted to implement their requested plans for increased capital distributions,” the Fed said.

They “are required to resubmit their capital plans to the Federal Reserve following substantial remediation of the issues that led to the objections.”

But the Fed said the five are permitted to continue with existing capital distribution programs.

Of the five, Zions Bancorp was the only one to fail a stress test — an examination to see how it would hold up under a severe economic crisis.

As announced last week, its basic capital strength fell below the five percent threshold in the test.

AFP Photo/Emmanuel Dunand

Fed Cuts Stimulus, Says Weather Hurt Growth

Fed Cuts Stimulus, Says Weather Hurt Growth

Washington (AFP) – The Federal Reserve cut back its stimulus program by another $10 billion Wednesday despite the recent U.S. economic slowdown, which it blamed “in part” on severe winter weather.

The Federal Open Market Committee reduced stimulus spending to $55 billion a month, saying the broader economy has “sufficient underlying strength” to support continued improvement in the labor market.

But new Fed Chair Janet Yellen said that the central bank still did not foresee raising its base fed funds interest rate until next year, as long as unemployment remains too high and inflation is well-controlled.

“We know we are not close to full employment,” she said.

In a review of recent conditions and its monetary policy, the FOMC said growth had slowed during the winter months, and that the housing sector recovery remains slow.

Meanwhile it called indicators from the labor market “mixed” but said that they “on balance showed further improvement.”

Despite the slower activity, the FOMC said that the cumulative progress in the economy and jobs market still justified another cutback to its bond purchase program, which it began tapering in December when it was $85 billion a month.

But in a significant shift to policy, the FOMC jettisoned the two specific numbers for unemployment and inflation that it set in December 2012 as thresholds for weighing a rate increase, saying the numerical thresholds no longer served policy communication.

The FOMC revised its forward guidance on rates to a more qualitative basis, Yellen said, “to better reflect conditions as they now stand, and are likely to evolve over coming quarters.”

The change came after the official unemployment rate, 6.7 percent last month, had neared the official threshold of 6.5 percent even while the FOMC saw the economy as not yet ready for higher rates.

The Federal Reserve meanwhile cut back slightly its economic growth forecast for this year and next, but said the unemployment rate would fall faster than it forecast in December.

The Fed said the economy was expected to grow 2.8-3.0 percent in 2014 and 3.0-3.2 percent in 2015.

Those figures took 0.2 percentage points off the high end of the range for both years.

But the Fed also forecast that the unemployment rate would drop to 6.1-6.3 percent this year — compared with the previous 6.3-6.6 percent range estimate — and to 5.6-5.9 percent in 2015.

It left its view of inflation largely unchanged, saying it could be as high as 1.6 percent this year and 2.0 percent next.

 

AFP Photo/Brendan Smialowski