U.S. Economy Probably Expanded at a 2.9% Rate in Second Quarter

First Published:	28/09/2006 12:17:34
The U.S. economy expanded at an annual rate of 2.9 percent in the second quarter, reflecting a slowdown in housing demand that may hamper economic growth into next year, economists said before a government report today. The expected pace of growth in gross domestic product, the sum of all goods and services produced in the U.S., follows a 5.6 percent rate in the previous quarter. The projection matches the government's preliminary estimate, reported last month. Residential construction fell by the most since 1995 last quarter, while smaller home equity gains limited consumer spending. A deteriorating housing market, a buildup in inventories and production cuts at automakers suggest the economy will slow from the second quarter pace for the rest of the year, allowing Federal Reserve policy makers to hold interest rates steady, economists said. ``The second quarter was the beginning of the slowdown we've been expecting for a while,'' said Gina Martin, an economist at Wachovia Corp. in Charlotte, North Carolina. ``The Fed is going to have to be increasingly worried about the extent of slowing in the economy, which may be more than they anticipated.'' The second-quarter forecast is based on the median estimate of 69 economists surveyed by Bloomberg News. Estimates ranged from 2.5 percent to 3 percent. The Commerce Department is scheduled to release the revised figures at 8:30 a.m. in Washington. The GDP figures will be the final of three estimates for the quarter. The economy expanded 3.2 percent for all of last year after growing 3.9 percent in 2004. Jobless Claims Also at 8:30, the Labor Department will report on initial claims for unemployment benefits. First-time claims last week probably fell to 315,000 from 318,000 the prior week, the Bloomberg survey showed. The Conference Board will issue its index of help-wanted advertising in U.S. newspapers for August. The index probably held at the lowest in 45 years last month as employers limit hiring and shift some ads to the Internet. The report is set for 10 a.m. The government said in its preliminary GDP estimate on Aug. 30 that home construction fell at an annual rate of 9.8 percent last quarter, the biggest drop since 1995. That figure may be ``modestly lower'' in the final GDP estimate, said Haseeb Ahmed, an economist at JPMorgan Chase Bank in New York. Reports this month suggest the housing slump is deepening as the supply of unsold homes swells. Sales of previously owned homes in the U.S. fell in August to the lowest since early 2004, and prices fell from year-ago levels for the first time since 1995, the National Association of Realtors said this week. Housing starts fell to a three-year low in August. Home Equity Borrowing The slowdown in housing will limit the cash consumers can obtain through mortgage refinancing and home equity borrowing, which have helped fuel household spending in the current expansion. Consumer spending last quarter rose at an annual rate of 2.6 percent, the same as reported last month and down from 4.8 percent in the first quarter, economists project the revised GDP figures this week to show. Spending will inch back up to a 3 percent rate this quarter before falling back to a 2.6 percent pace in the first half of next year, according to economists surveyed by Bloomberg News Sept. 1 to Sept. 7. Lower sales of cars and light trucks have prompted second- half production cuts at Ford Motor Co., General Motors Corp. and DaimlerChrysler AG's Chrysler unit. Furniture retailer Ethan Allen Interiors Inc. said this week that sales in the quarter ended Sept. 30 will decline because of weak consumer confidence. Fed Statement ``The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market,'' the Fed said in a statement Sept. 20, when it kept its benchmark interest rate at 5.25 percent for a second month. A measure of inflation tied to the GDP report is forecast to rise at an annual rate of 3.3 percent, the same as the government estimated earlier, according to the median forecast in the Bloomberg survey. A resilient labor market, mortgage rates that have declined in recent weeks, and ebbing fuel costs may keep consumer spending from sliding further, limiting the drag from housing on second- half growth, economists said. Midland, Michigan-based Dow Chemical Co., world's second- biggest chemical company, expects to sustain growth rates in the U.S. and Europe as those economies experience a ``soft landing,'' Chief Executive Andrew Liveris in an interview. Oil Price Profitability will improve thanks to the falling price of crude oil, Liveris said yesterday at a groundbreaking ceremony for a plant it is building with Germany's BASF AG in Antwerp, Belgium. A gallon of regular gasoline at the pump cost $2.38 this week, down from an average of $2.85 in the second three months of the year, U.S. Energy Department figures show. The International Council of Shopping Centers this week boosted its September forecast. The retail trade group projected a sales increase of at least 4 percent at U.S. stores open a year or more, up from its previous forecast of 3.5 percent gain. Confidence among U.S. consumers rebounded more than forecast in September from a nine-month low, a report from the New York- based Conference Board showed. Almost 1 in 3 Americans said lower fuel prices have allowed them to spend more on other goods, according to a recent Bloomberg/Los Angeles Times survey. ``We all knew housing would be a drag on economic growth, but no one expected energy prices to fall,'' said Michael Gregory, a senior economist at BMO Capital Markets in Toronto. ``The bar was set very low for the consumer for the second half, but we may still have a decent holiday shopping season, assuming energy prices stay down.''
Source:  Bloomberg http://www.bloomberg.com