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Economy too weak to slow bonds

| Thursday, June 27, 2013, 12:01 a.m.

WASHINGTON — The economy may not be strong enough for the Federal Reserve to slow its bond purchases this year.

That's the takeaway from economists after the government cut its estimate on 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. The main reason: Consumers spent less than previously thought.

Most economists think growth will remain low as consumers and businesses continue to adjust to federal spending cuts and higher taxes. Growth is expected to reach an annual rate of only about 2 percent in the April-June quarter. Even if the economy improves slightly, it would be hard to meet the Fed's forecast of 2.3 percent to 2.6 percent growth for 2013.

Chairman Ben Bernanke rattled investors last week when he said the Fed will likely slow its bond buying this year if the economy continues to strengthen. The bond purchases have helped keep interest rates low. Bernanke added that if the economy weakens, the Fed won't hesitate to delay its pullback or even step up its bond purchases again.

Jennifer Lee, senior economist at BMO Capital Markets, said that if the April-June quarter proves tepid, the Fed will be looking at three straight quarters of subpar growth.

“The Fed won't taper (its bond purchases) under these conditions,” Lee said. “They need convincing signs of a pickup.”

Joel Naroff, chief economist at Naroff Economic Advisers, said he suspects the Fed will wait until next year to slow its bond buying. Like most economists, Naroff thinks growth will pick up in the October-December quarter and strengthen in 2014.

“If the Fed doesn't take notice of this revision to growth, they would run the risk of being perceived as largely clueless about the economy,” Naroff said.

Stocks surged on Wednesday, a sign that many investors also suspect the economy may prove too weak for the Fed to begin scaling back its stimulus later this year.

The Dow Jones industrial average closed up nearly 150 points. Broader stock indexes also surged.

Most of the revision to last quarter's growth was because of a decline in consumer spending to an annual rate of 2.6 percent. Though that pace is the fastest in two years, it's sharply below the 3.4 percent rate previously estimated.

A key factor was weaker spending on services, such as travel, legal services, health care and utilities. Spending on long-lasting manufactured goods, considered a barometer of consumers' confidence in the economy, was stronger than previously estimated.

Some economists said the lower estimate suggests that an increase in Social Security taxes that took effect this year might be squeezing consumers more than expected. The tax increase has reduced take-home pay for most Americans. A person earning $50,000 a year has roughly $1,000 less to spend. A high-earning couple has up to $4,500 less.

“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, mainly because of less spending on buildings than previously estimated.

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