U.S. economy grew 1.9% in 1Q on consumer spending

THE U.S. ECONOMY grew 1.9 percent in the first quarter, reflecting a gain in consumer spending that now shows signs of cooling as the labor market weakens.
Posted 6/28/12

WASHINGTON - The U.S. economy grew 1.9 percent in the first quarter, reflecting a gain in consumer spending that now shows signs of cooling as the labor market weakens.

The revised gross domestic product reading matched the increase previously calculated by the government, Commerce Department figures showed today in Washington. Corporate profits were revised to show a drop, the first in more than three years.

Slowing sales at companies from Darden Restaurants Inc. to O’Reilly Automotive Inc. indicate American households are reluctant to boost their spending, which accounts for about 70 percent of the economy. A struggling job market and slowing global markets will make it harder to spur the U.S. expansion, underscoring the concern of Federal Reserve policy makers.

“The economy is really in a difficult spot at the moment,” said Jeremy Lawson, a senior U.S. economist at BNP Paribas in New York. “With the labor market weak and the outlook for incomes weak, it’s hard to see how consumer spending can grow solidly.”

The median forecast of economists surveyed by Bloomberg News was 1.9 percent following a 3 percent increase in the prior quarter. Projections of the 75 economists polled ranged from 1.5 percent to 2.3 percent. The government’s GDP estimate is the third and final for the first quarter.

The number of applications for unemployment benefits hovered last week near the highest level of the year, showing little improvement in the labor market, another report today showed.

Jobless claims

Jobless claims decreased by 6,000 to 386,000 in the week ended June 23, in line with the median forecast of economists surveyed by Bloomberg News, according to data from the Labor Department. The prior week’s reading was revised up to 392,000 from 387,000, matching an April figure as the steepest of 2012.

Stock-index futures held earlier losses after the reports. The contract on the Standard & Poor’s 500 Index maturing in September fell 0.5 percent to 1,319.1 at 8:47 a.m. in New York as investors waited to see if European leaders could formulate news plans to address the debt crisis during a two-day summit.

The GDP revision reflected a smaller gain in consumer spending that was offset by a gain in commercial construction and a smaller trade deficit than previously reported.

Household purchases rose at a 2.5 percent annual pace compared with a previously reported 2.7 percent gain. The prior quarter’s rise was 2.1 percent.

Retail sales

The smallest wage gains in a year and unemployment exceeding 8 percent are taking a toll on shoppers. Retail sales fell 0.2 percent in May, matching the decrease in April, Commerce Department figures showed earlier this month. Sales excluding car dealerships slumped by the most in two years.

Darden, owner of the Red Lobster, Olive Garden and LongHorn Steakhouse restaurant chains, reported fourth-quarter revenue that trailed analysts’ estimates because of an unexpected drop in sales at its older establishments. The company said customers grew more cautious in May, and it will focus more on affordability in its promotional offers.

“We saw the consumer get a lot more cautious in May,” Clarence Otis, chairman and chief executive officer at Darden, said on a June 22 conference call with analysts. “And that was not just at Red Lobster, but across the restaurant industry” and “generally across the overall consumer environment beyond restaurants.”

Households are trimming purchases of expensive items like automobiles as the labor market softens. Cars and light trucks sold at a 13.7 million annual rate in May, the weakest this year and down from April’s 14.4 million pace, Ward’s Automotive Group data showed.

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