June 27, 2013

Growth revision tempers outlook

The Fed might have to wait on slowing its bond buys after new data show a weaker first quarter.

The Associated Press

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

That's the takeaway from economists after the government cut its estimate 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 said 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 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.

The revision in first-quarter growth tempered encouraging signals from the latest economic reports released Tuesday. U.S. factories are fielding more orders. Higher home sales and prices are signaling a steady housing recovery.

Naroff said that if growth doesn't accelerate until the fourth quarter, then the Fed may wait on tapering off its bond-buying program.

"I don't see that happening until the spring," he said.

 

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