Rebecca Byrne
One of the main culprits behind decelerating economic growth during the second quarter was consumer spending, which was hurt by higher energy prices. MG Financial Group analyst Ashraf Laidi said spending probably cooled to between 1.8% and 2% in the quarter, down from 3.8% in the first quarter.
A 1.8% increase in consumer spending would be the weakest growth since the first quarter of 2001, when the economy was officially in a recession. "But this negative impact is expected to be cushioned by a near doubling in business and residential fixed investment from 5.3% and 4.6% in the first quarter," Laidi said. Laidi thinks the PCE index could rise to 3.5% from 3.2% in the first quarter, with the core rate up to 1.6% from 1.3%. Inflation has been rising this year, largely due to increases in food and energy costs. While it's possible that oil prices will remain high over the coming months (crude briefly touched $43 a barrel Wednesday), food costs could certainly come down going forward. State farmers are already cutting milk prices as new government price limits take effect Aug. 1. The "threshold" price will decrease to $3.31 a gallon from $3.89 a gallon this month. In June, a gallon of milk hit a record $4.43 a gallon, twice as much as a gallon of fuel. Surveys have indicated that health care inflation is also likely to recede next year, and more schools are adopting freezes or caps on tuition rates. Meanwhile, the end of global clothing quotas on Jan. 1, 2005, could result in a new wave of low-cost imports, which could potentially send apparel prices lower. "Suffice it to say that the four groups -- food, medical care, apparel and education -- collectively account for roughly 30% of the consumer price index and could well anchor a surprising downturn in inflation in the coming year," said Merrill Lynch Chief Economist David Rosenberg in a research note.
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