Economy too weak to slow bonds
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.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Energy sector adjusts to global oil plummet
- Kim Komando: Can you get a virus on your smartphone?
- Agriculture prospects envisioned in Cuba
- ‘Staff Pick’ is golden ticket on Kickstarter
- Mind the time: Optimize last-minute shopping
- Drought opens Texas ranchers’ eyes to income options
- Makers of wine corks have lost ground to screw tops
- Diane Stafford: Consider digital footprint
- Real estate union: Howard Hanna buys Langholz Wilson Ellis
- 3 tips to use up health account funds
- ‘Cause for Paws’ telethon helps dogs find homes