--US GDP shows cap spending worrying, low inventory hopeful
By Mariko de Couto
New York, July 27 (BridgeNews) - U.S. second-quarter growth was lower than expected, supporting the need for another 25-basis-point cut easing by the Federal Reserve at the next meeting in August, economists said. The concern was the considerable weakness in capital spending, but economists also noted that signs of major cuts in inventory levels again for the second quarter in a row bodes well for growth in the second half of the year.
Second-quarter GDP rose 0.7%, lower than the consensus forecast of a 1% growth rate and the lowest since the first quarter of 1993.
The second-quarter GDP report clearly showed that inventory reduction among businesses was conducted rapidly in the first half of the year. This will set the stage for inventory accumulation in the second half of the year, helping to buoy overall GDP growth, economists said.
Economists noted that contraction in capital spending was a major concern in the report. Capital spending plunged 13.6%, the largest decline seen since the second quarter of 1982.
In a way, the overall plunge in capital spending was expected because of the 20% plunge in non-defense capital goods orders. However, economists were quite alarmed by the surprise 11.2% drop in business spending on buildings.
Capital spending in structures is usually not a volatile component of the report, prompting economists to say that businesses may continue to restrain spending.
As expected, spending in business equipment and software was weak, registering a decline of 14.5%.
Consumer spending was up 2.1%, but the first-quarter number was revised down to up 3.0% from the original reading of 3.5%. (Story .4739) Christopher Low, chief economist at First Tennessee Capital Markets, said that the GDP report does show that Fed will continue to ease at least one more time in August.
Low expects another 25-basis-point cut in the federal funds target rate.