Thursday, August 28, 2008

U.S. Economy: GDP Exceeds Initial Estimate on Exports (Update2)

By Courtney Schlisserman and Timothy R. Homan

Aug. 28 (Bloomberg) -- The U.S. economy expanded faster than previously estimated in the second quarter, helped by a surge in exports that will probably wane as Europe and Japan head toward recessions.

Gross domestic product increased at a 3.3 percent annual pace, compared with the initial estimate of 1.9 percent, the Commerce Department said today in Washington. Trade contributed the most to U.S. growth in almost three decades.

The expansion is likely to weaken in the second half as consumers burdened with falling home values and dwindling job prospects rein in spending. Separate figures today showed the number of Americans collecting unemployment benefits reached a five-year high last week.

``Outside of trade, the economy is considerably weaker,'' said Carl Riccadonna, an economist at Deutsche Bank Securities Inc. in New York. ``When you look at the spending, it looks terrible for the second half of the year.''

The increase in GDP last quarter was bigger than the median estimate of a 2.7 percent gain in a Bloomberg News survey of 78 forecasters. The expansion was the fastest since the third quarter of 2007 and followed growth of 1.9 percent in the first three months of the year.

Treasuries dropped after today's reports, sending benchmark 10-year note yields up to 3.78 percent at 4:14 p.m. in New York, from 3.77 percent late yesterday. The Standard & Poor's 500 Stock Index rose 1.5 percent to close at 1,300.68.

Jobless Claims

The Labor Department said initial jobless claims dropped to 425,000 last week, matching economists' forecasts, from 435,000 the previous week. The level remains well above the 321,000 average of last year. The number of people staying on unemployment rolls rose to 3.423 million, the highest since November 2003.

``The labor market may continue to weaken,'' said Russell Price, a senior economist at H&R Block Financial Advisors Inc. in Detroit. ``It's become clear that second-half growth isn't going to be as strong as the first half, so businesses are going to finally start to trim payrolls a little more.''

The smallest trade deficit in eight years was the biggest contributor to growth last quarter. The trade gap narrowed to a $376.6 billion annual pace and added 3.1 percentage points to growth, the most since 1980. Excluding trade, the economy would have expanded at a 0.2 percent pace after growing 0.1 percent in the first three months of the year.

Tiffany's Sales Gains

Tiffany & Co., the world's second-largest luxury-jewelry retailer, today posted profit and sales gains that exceeded analysts' forecast, helped by strength in Europe. The company has accelerated its international expansion, planning to increase worldwide locations by 13 percent through early 2009. It had 196 stores and boutiques, including 72 in the U.S., 95 in Asia Pacific and 19 in Europe, as of July 31.

Total sales were ``strong'' in Europe and Asia-Pacific, Tiffany said in a statement.

Other companies are looking to Asia, Europe and the Middle East to offset slowing demand in North America. Caterpillar Inc.'s order books for large machines are full through the end of next year, and its factories in Asia are running at full capacity to meet demand in China, Chief Executive Officer Jim Owens said today at a press briefing in Beijing.

Caterpillar Investment

Caterpillar, the world's biggest maker of earthmoving equipment, will invest more than $100 million to triple capacity at its Shandong SEM Machinery Co. unit in northern China, Owens said. It will put another $20 million in the first of three building phases of a new research and development center in the eastern Chinese city of Wuxi to test engines, materials and electronics for manufacturing operations in the Asia-Pacific region.

The boost from trade may wane in the rest of the year as growth among some of the U.S.'s biggest trading partners slows. Europe and Japan both shrank last quarter.

Today's GDP report is ``kind of the last hurrah'' for the U.S. economy, Martin Regalia, chief economist for the U.S. Chamber of Commerce, said at a press conference today. ``We've begun the process of slipping into a good old-fashioned recession.''

Private economists aren't the only ones taking a dimmer view. Federal Reserve staff also ``marked down'' the central bank's forecast for growth in the second half of 2008, according to minutes of the Federal Open Market Committee's Aug. 5 meeting released this week.

Softer Export Demand

Fed policy makers also said recent reports pointed to ``softer export demand,'' according to the minutes.

Consumer spending, which accounts for more than two-thirds of the economy, grew at a revised 1.7 percent annual rate in the second quarter, compared with the 1.5 percent estimated last month and 0.9 percent for the first three months of the year.

The longest expansion in consumer spending on record will probably end this year, according to economists surveyed by Bloomberg earlier this month. Retail sales fell in July for the first time in five months, led by a slump in auto purchases, according to Commerce data.

``We are in a recession,'' Farooq Kathwari, chief executive officer at Ethan Allen Interiors Inc., said in an interview with Bloomberg Television this week. ``Our industry has been impacted. Conditions are still tough.''

The Danbury, Connecticut-based home-furnishings retailer said last month that sales fell 8.7 percent in the second quarter compared with the same period last year.

Jobs, Spending

A weakening labor market is one reason consumer spending is likely to slow after the government sent out about $92 billion in tax rebate checks. The U.S. has lost 463,000 jobs so far this year and wages haven't kept up with inflation, according to Labor Department data.

``We don't have a lot of demand out there on the part of consumers, so there is a worry,'' Joel Naroff, chief economist at Commerce Bancorp Inc. in Holland, New Jersey, said in a Bloomberg Radio interview. ``What we're looking at is an economy that's bouncing around, but when you really average it out we're just muddling along -- still some growth but nothing special.''

Smaller increases in paychecks are another reason Americans are likely to cut back. Wages and salaries increased by $52.5 billion in the first three months of the year, $20.2 billion less than previously estimated, according to today's revised estimates.

The reduction caused total personal income to grow at a 3 percent annual pace in the first quarter, compared with a previous estimate of 3.7 percent.

Housing Slump

Today's revisions showed housing continued to slump and companies invested less in new equipment. Residential construction decreased at a 15.7 percent pace, more than previously estimated.

The slide in residential construction has continued this quarter. Housing starts last month fell 11 percent and building permits also declined, the government said Aug. 19.

A smaller decline in stockpiles contributed to the larger- than-forecast gain in growth. Inventories fell at a $49.4 billion annual rate from April through June, down from a $62.2 billion first estimate. Still, the draw-down subtracted 1.44 percentage points from growth.

Today's report also included a first look at corporate profits for the second quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, decreased 2.4 percent to an annual rate of $1.56 trillion. Earnings were down 7 percent from the same time last year, the biggest decrease since the 2001 recession.

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