U.S. Economic Growth to Slow as Car Rebates End, Survey Shows
The U.S. economy will pull out of the recession at a faster pace than previously forecast, before slowing as the end of the government’s auto-rebate program weighs on consumer spending, a survey of economists showed.
The economy will expand at a 2.9 percent annual rate in July through September, according to the median of 61 estimates in a monthly Bloomberg News survey, compared with a forecast of 2.2 percent the previous month. Growth is projected to slow to a 2.2 percent pace during the last three months of the year.
The new projections follow a record drop in borrowing by Americans and an unemployment rate that jumped last month to a 26-year high, suggesting that business and government spending rather than consumer purchases will determine the strength of recovery from the worst economic slump since the Great Depression.
“This is some of the payback from the cash for clunkers, the feeling that a lot of that activity was just pulled forward from future months,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. “We’re very cautious about the consumer. Household balance sheets are basically a wreck.”
Consumer spending likely rose 1.7 percent this quarter as buyers took advantage of discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles. Spending growth will ease to a 1 percent pace in the fourth quarter, the survey showed. The rebates ended on Aug. 24.
Analysts in the survey put the odds of a double-dip recession in the next 12 months at 25 percent, up from 20 percent last month.
Holiday Shopping
The slowdown in consumer spending, which comprises about 70 percent of the economy, will coincide with the holiday shopping season, when many stores expect to reap half of their annual revenue. Macy’s Inc. Chairman and Chief Executive Officer Terry Lundgren said this week that the second-largest U.S. department store company plans to hire staff for the holiday season.
Americans are borrowing less as banks and credit-card companies tighten lending standards. Consumer credit fell by 10 percent at an annual rate in July to $2.5 trillion, according to a Federal Reserve report this week. The $21.6 billion drop was the sixth consecutive decrease, making it the longest series of declines since 1991.
“Consumer spending remained soft in most districts,” the Fed said two days ago in its Beige Book business survey, published two weeks before officials meet to set monetary policy. The central bank said 11 of its 12 regional banks reported signs of a stable or improving economy in July and August.
Manufacturing ‘Improvements’
Manufacturing showed “modest improvements” in most regions, the Fed said. Companies were “cautiously optimistic,” with New York among three districts reporting that contacts “expect modest growth later this year or early 2010.”
The government’s “cash for clunkers” program increased spending and had an impact on payrolls free credit score online. General Motors Co. last month called back 1,350 union workers, its biggest one-time increase in jobs since 2006, as it boosted second-half production in part because of the trade-in program.
The economy will grow 2.4 percent next year, followed by a 2.9 percent expansion in 2011, according to the median forecast in the Bloomberg survey, taken from Sept. 3 to Sept. 10. The forecasts are little changed from last month’s estimates.
The Standard & Poor’s 500 Index has climbed 54 percent since March 9, when it hit a 12-year low, on optimism that the U.S. is emerging from the recession.
The world’s largest economy contracted 1 percent from April through June, the Commerce Department said last month. The drop was the fourth in a row, making it the longest contraction since quarterly records began in 1947.
Stimulus Program
President Barack Obama in February signed into law a $787 billion stimulus package aimed at stabilizing the economy through tax cuts, infrastructure spending and a goal of creating or saving about 3.5 million jobs. Almost all Republican lawmakers voted against the legislation and have since criticized the program as poorly targeted and a threat to the federal budget.
The stimulus will likely add up to 3 percentage points to growth in July through September, the Obama administration said yesterday in its first quarterly report to lawmakers in Washington on the economic impact of the program. The White House also said the fiscal spending program has created or saved as many as 1.1 million jobs since its implementation in February.
Unemployment to Rise
The anticipated expansion won’t be enough to prevent the unemployment rate from reaching 10 percent by the end of this year for the first time since 1983, the latest survey showed. That will force the Fed to forego raising its benchmark interest rate until the third quarter of 2010, according to the median projection.
Cars and light trucks sold at a 14.1 million annual pace last month, up 25 percent from July, industry figures showed. It was the biggest gain since October 2001, when automakers including GM introduced interest-free financing to boost sales following the terrorist attacks on New York and Washington.
“If anything, consumer spending is going to be the caboose in this recovery,” said Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts. “As long as we see this positive dynamic in terms of the global economy, the recovery can move ahead and the consumer doesn’t have to be leading the charge.”
World growth of 3 percent is expected next year, according to the survey median. France, Germany and Japan — all major trading partners of the U.S. — expanded in April through June.
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