Washington: Bearish forecasts for the US economy are giving way to more upbeat views of the nation’s ability to weather federal spending cuts and tax increases.
At Morgan Stanley in New York, chief US economist Vincent Reinhart now sees a 3% pace of growth in the first quarter, up from 0.8% in December. JPMorgan Chase and Co.’s Bruce Kasman raised his forecast to 3.3% from 1%.
“What happened at the beginning of the year was a genuine surprise in terms of how well the economy held up,” Kasman, the firm’s New York-based chief economist, said in a 5 April conference call.
Gross domestic product (GDP) probably climbed at a 3% annualized rate from January through March, according to the median forecast in a Bloomberg survey of 69 economists from 5 April to 9 April. That’s up from the 2% gain projected last month and 1.6% in December.
Consumers overcame a 2 percentage point increase in the payroll tax and higher gasoline prices to spend at the fastest pace in two years, the survey shows. The pick-up, combined with sustained gains in housing and business investment, will help propel the expansion through the worst of the automatic government cuts that are projected to take effect this quarter.
“We are surprised that there wasn’t a bigger and more immediate hit to spending by consumers,” said Reinhart. “There is an underlying momentum in spending, which means that sequestration and the tax increase will only lead to a momentary pause.”
The Bloomberg survey shows the expansion will cool this quarter, to a 1.5% pace, then reaccelerate to an average 2.4% rate in the last six months of 2013.
A US commerce department report on Friday showed retail sales in March unexpectedly fell by the most in nine months, indicating households ended the first quarter on a softer footing.
Consumer spending, which accounts for 70% of the economy, climbed at a 3% annualized rate in the first quarter, the best reading since the same period in 2011, according to the Bloomberg survey median. Last month’s survey projected a 1.6% advance.
“We feel good about the consumer in 2013,” Karen M. Hoguet, chief financial officer of Macy’s Inc., said in a 13 March investor conference. “Every indication we’re seeing is that he and she are doing fine, still buying.”
The levy used to fund Social Security reverted to 6.2% of income this year, the same as in 2010, from 4.2% in each of the past two years as part of the agreement to avert the so-called fiscal cliff of tax increases and spending cuts that were to take effect in January. That reduced take-home pay by about $83 a month for anyone earning $50,000 a year.
Buoyed by rising stock and home prices and a surge in income at the end of last year, households responded to the higher taxes by putting less money away in the bank, Kasman said. The saving rate, or the share of disposable income that consumers set aside, plunged to 2.2% in January, the lowest since August 2007, from 6.5% the prior month, according to figures from the commerce department. It improved to 2.6% in February.
“The fundamentals do look firmer,” said JPMorgan’s Kasman. “The business sector is looking like it’s healthy.” While he sees growth slowing to 1.5% this quarter, he projects it will pick up to 2% in the third quarter and to 2.5% in the last three months of the year.
Among the improving fundamentals is the country’s growing fuel independence. The US produced 84% of its own energy in 2012, the most since 1991, according to data from the Energy Information Administration (EIA), the statistical arm of the energy department. The measure of self-sufficiency rose to 88% in December, the highest since February 1987.
US production of crude oil in the fourth quarter of this year will exceed imports for the first time since 1995, as extraction from shale rock formations in North Dakota and Texas put the nation on track to surpass record output, the EIA projected last month.
Low-cost energy has been a boon for US refiners, who are processing cheaper domestic oil to make fuel to meet rising demand in countries such as Brazil, China and India. Shares of Marathon Petroleum Corp. and Phillips 66 hit records in January after earnings beat estimates. In the first week of March, US exports of products such as gasoline and diesel rose to a record 3.2 million barrels a day, according to EIA data.
Cheap natural gas has also attracted investment in steel making, petrochemicals and fertilizers, such as the $550 million methanol project being built by Methanex Corp. in Geismar, Louisiana. The fuel has declined 73% to $4.139 per million British thermal units since reaching a peak in 2005. Bloomberg
Rich Miller, Michelle Jamrisko and Cotten Timberlake in Washington and Asjylyn Loder in New York contributed to this story.