Economy in U.S. Expands Less Than First Estimated

Bloomberg:

The U.S. economy grew in the first quarter at a slower pace than previously calculated, reflecting smaller gains in consumer and business spending and highlighting the risks to the recovery posed by the European debt crisis.

The 3 percent increase at an annual rate in gross domestic product was less than the median estimate of economists surveyed by Bloomberg News and compares with an advance estimate of 3.2 percent issued last month, figures from the Commerce Department showed today in Washington. Corporate profits grew and incomes were revised down.

Households are gaining confidence this quarter as employment improves, and manufacturing is powering ahead as business investment and exports keep growing. The setback in stocks and rebound in the dollar caused by Europe’s financial troubles may cool spending here and abroad, giving the Federal Reserve additional scope to keep interest rates low.

“We are at a fairly fragile turning point,” said Julia Coronado, a senior U.S. economist at BNP Paribas in New York. “There’s a lot of headwinds that the economy is struggling with.”

More Americans than forecast filed applications for unemployment benefits last week, indicating firings persist even as the economy rebounds and employment picks up, figures from the Labor Department also showed today. Initial jobless claims fell by 14,000 to 460,000 in the week ended May 22. Economists forecast claims would drop to 455,000, according to the median estimate in a Bloomberg News survey.

Shares Rebound

Stock-index futures trimmed earlier gains following the reports. The contract on the Standard & Poor’s 500 Index rose 2 percent to 1,082.5 at 8:56 a.m. in New York. Treasury securities dropped, pushing the yield on the 10-year note up to 3.27 percent from 3.19 percent late yesterday.

GDP was forecast to grow at a 3.4 percent annual pace, according to the median estimate of 79 economists surveyed. Projections ranged from gains of 3 percent to 4.1 percent.

Consumer spending, which accounts for about 70 percent of the economy, rose at a 3.5 percent pace last quarter, compared with the 3.6 percent the government estimated last month and a 1.6 percent gain in the prior three months. The first-quarter increase was the biggest since 2007.

Corporate Profits

Company earnings increased 5.5 percent in the first quarter after climbing 8 percent in the previous three months. Earnings were up 31 percent from the same time last year, the biggest year-over-year gain since 1984, one reason why hiring and spending on capital equipment is improving.

Chrysler Group LLC, the automaker controlled by Fiat SpA, posted a $143 million operating profit in its first quarter and said last week that it will add a second shift to a Detroit factory that makes Jeep Grand Cherokees.

The company will add 1,100 workers at the assembly plant to increase production of the redesigned sport-utility vehicle, Chief Executive Officer Sergio Marchionne said at a May 21 news conference. He said he expects to add jobs at other Chrysler plants, without specifying which factories.

Today’s report also revised household earnings data covering the past two quarters. Wages and salaries decreased by $13.2 billion in the last three months of 2009, a downward revision of $30.3 billion. The figures, which incorporate new data on bonuses and stock options, indicate employment may have been weaker at the end of last year than current data show.

Less Income

Today’s report also showed that gross domestic income, or the money earned by the people, businesses and government agencies whose purchases go into calculating growth, grew at a slower pace than GDP before adjusting for inflation during the past two quarters. According to Fed research, GDI is a better gauge of the economy, signaling growth may be overestimated.

Since then, mounting concern over the sovereign-debt crisis in Europe has rattled global financial markets. The Standard & Poor’s 500 Index is down 8.7 percent from March 31 through yesterday, and the dollar index, which tracks the currency’s performance against six major currencies including the euro and yen, is up 7.6 percent.

The drop in stocks will damp household wealth, leading to smaller gains in consumer spending over the next year than would otherwise be the case, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. The advance in the dollar will also hurt American exports, he said.

Posted via email from Jim Nichols