By Chris Cermak

WASHINGTON (MNI) – High gasoline prices and supply disruptions from
Japan’s earthquake are once again expected to have had a negative impact
on the sluggish U.S. recovery when second-quarter output figures are
released later this week.

The advance GDP estimate Friday is expected to report growth at a
1.9% annual rate in the April-June period, the same as in the first
three months of the year, according to a survey of economists by Market
News International. The price index is expected at 2%.

Costly energy, weak auto production and extreme weather all likely
played a part in keeping output low. Consumer spending — the largest
component of GDP — may record a gain below 1% for the first time since
the end of 2009, after a 2.2% increase in the first quarter.

“Obviously there was a slowing down in economic growth, due to
temporary factors,” Thomas Julien, an economist with Nataxis North
America, said in an interview with MNI.

Julien notes the consumption weakness has renewed some fears that
the U.S. is headed toward a double-dip recession, but adds that in our
main economic scenario, we still focus on a moderate recovery — in the
second half of the year.

Automotive output led weakness in industrial production, which rose
at an annual rate of 0.8% in the second quarter, according to the
Federal Reserve. Drops in the ISMs manufacturing survey to as low as
53.5 in May also suggested the sector veered close to another
contraction in the April-June period.

But the transitory nature of the output pressures means the Federal
Reserves forecast of 2.7% to 2.9% growth for the year remains “doable”
if output picks up in the second half, according to Michael Moran, chief
economist with Daiwa Capital Markets.

Supply disruptions, combined with extreme weather in many regions
of the United States, could have shaved 0.5-1% off second-quarter GDP
growth, Moran told MNI.

The trade balance meanwhile will likely have a stronger impact on
GDP than its 0.16% contribution in the first quarter, as exports
continued to rise and imports from Japan in particular fell, but the
lack of June trade balance data makes up a large part of the discrepancy
between economists over the second-quarter outlook.

Business investment and inventories are also expected to make
positive contributions. Government spending could rebound slightly after
a negative first quarter.

Economists are eyeing the housing sector, energy prices and the
ongoing political debate over raising the debt ceiling as key downside
risks going forward. Residential investment is likely to make another
negative contribution in the second quarter.

Moran said the debt ceiling debate may have already restrained
spending slightly in June, but said he would look for a more significant
impact on consumption starting in July, even if a default on the
nations debts is avoided.

“I think as we get into the third quarter its going to be more of
a factor,” Moran said. “A lot of businesses and consumers might have
pulled back in July” amid the partisan wrangling in Congress.

The second-quarter GDP advance estimate will be released at 8:30
a.m. ET Friday by the Commerce Department.

— Chris Cermak is a Washington reporter for Need to Know News

** Market News International Washington Bureau: 202-371-2121 **

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