Slower growth in U.S. economy might lead Federal Reserve to delay tampering

The Federal Reserve Bank cut its estimate Wednesday of growth in the January-March quarter to a 1.8 percent annual rate, sharply below its previous estimate of a 2.4 percent rate.
By MARTIN CRUTSINGER and CHRISTOPHER S. RUGABER Published: June 27, 2013
Advertisement
;

“There was still acceleration in the growth of consumer spending — just not as much,” said Paul Edelstein, director of financial services at IHS Global Insight.

The government's revisions also pointed to less export growth and weaker business investment spending, due mainly to less spending on buildings than previously estimated.

For each quarter, the government issues three estimates of growth as it collects increasingly precise data on the nation's gross domestic product. GDP reflects the economy's total output of goods and services.

In Wednesday's third and final estimate of first-quarter growth, for example, the government lowered its figure for consumer spending based on newly available data from a quarterly Census Bureau survey of services spending.

Edelstein cautioned that the government has trouble calculating spending on services. The estimate could change further next month, when the government will issue the revisions it makes to GDP every five years.

Wednesday's revision of 0.6 percentage point was larger than the government usually makes in its third estimate of GDP. From 1983 through 2009, the average change from the second to third estimate was 0.2 percentage point, the department says.

But the change from the first estimate to its third one — from an annual rate of 2.5 percent growth to a 1.8 percent rate — was close to the average: 0.6 percentage point.

“We do not want to overreact to the Q1 data,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities. He noted that the government has tended to revise up its monthly employment data — a trend, that if it continued, would “suggest on balance that real GDP growth could be understated.”

The biggest drag on the economy remains government spending. It fell during the first quarter at an annual rate of 4.8 percent. That shaved 0.9 percentage point from growth.

Economists expect steep federal spending cuts to continue to weigh on growth in the second and third quarters. Edelstein predicts annual growth rates of just 1.5 percent in the current quarter and 1.8 percent in the July-September quarter.

Naroff is more optimistic than most: He's forecasting annual growth rates of 2.5 percent in both quarters.

Still, both think the Fed is unlikely to scale back its bond purchases until annual growth moves closer to 3 percent.

Mark Zandi, chief economist at Moody's Analytics, said he suspects the Fed will wait until its December meeting to slow its bond purchases, rather than in September as many have been predicting.

Zandi thinks the unemployment rate should reach 7 percent by the middle of next year, in line with the Fed's projections. It's now 7.6 percent.