Tepid Economic Growth in Japan

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Consumer Prices Rise in Japan, Suggesting Stronger Growth

TOKYO — Japan’s economy is gaining momentum, data for October showed, with consumer prices excluding food and energy rising 0.3 percent from a year earlier. It was the biggest gain since 1998, but household spending remained tepid as incomes slipped from the same month a year before.

The various indicators released on Friday suggested that the very loose monetary policy and stimulus strategy of Prime Minister Shinzo Abe are helping end Japan’s long bout of deflation.

Industrial output rose 0.5 percent in October, the second monthly advance, driven by increases in the production of machinery used to make computer chips and other industrial products, plastics and cellphones.

The government reported that the core consumer price index, excluding food costs, rose 0.9 percent from the year before. Including both food and energy, prices rose 1.1 percent.

Japan’s jobless rate remained flat in October, though the number of jobs available rose slightly.

Further improvement is expected in November, aided by strength in housing construction and exports.

“Business conditions in the Japanese manufacturing economy improved for the ninth consecutive month and at a rapid pace in November, driven for the most part by an expansion of both foreign and domestic demand,” said Claudia Tillbrooke, an economist at Markit, who compiles its purchasing manager’s index for Japan. That index rose to 55.1 in November, from 54.2 in October. A reading above 50 suggests expansion.

The government and central bank have set a target for attaining a 2 percent inflation rate within two years. So far, economists say, most of the increase in prices has come from a weakening in the Japanese yen, which erodes consumer spending power and increases costs in yen terms for imports of fuel, food and industrial components.

Overall household spending, which accounts for nearly two-thirds of Japan’s economic activity, rose 0.9 percent in October. Excluding housing costs, spending fell 1.5 percent from the month before and 0.3 percent from September. Workers’ incomes fell an average of 1.3 percent in October.

Concern Over Japan’s Growth Strategy

HONG KONG — Nearly a year after the Japanese began to hope that their economy could turn around under new leadership, a sense of realism is replacing the euphoria.

Economists and investors have grasped just how difficult it will be for Prime Minister Shinzo Abe to sustain the growth of the last few months. Nowhere is that sentiment more evident than the Japanese stock market. The Nikkei 225 index is now nearly 40 percent above where it started the year, but the gains during the last four months have been slight — just 3.4 percent.

The economic recovery Mr. Abe engineered during the last year has been remarkable given the decades Japan in which languished. Buoyed by a big pickup in public works spending and a Bank of Japan policy of flooding the economy with low-interest money, growth has accelerated markedly. Deflation, the country’s biggest economic problem, seems to have disappeared.

The Japanese central bank said on Thursday that it now expected the economy to expand 1.5 percent in the year starting next April, up from a previous forecast of 1.3 percent.

The yen, whose persistent strength weighed on Japan’s important export sector for years, has fallen, making Japanese goods more competitive. That has helped corporate earnings recover, too.

For many ordinary Japanese and small businesses, however, the benefits so far are less tangible. “There is no Abenomics effect at all here,” Wakana Otake, the owner of a shop that sells ties in the Ginza shopping district of Tokyo, said Thursday. “We heard luxury items sell well in department stores and so on,” but her shop had seen no benefit so far, she said. “It’s actually worse than last year, and last year was worse than the previous year.”

Economists say some of the hardest work remains. Japan’s leaders still have not taken on the far-reaching structural changes to make the country’s businesses more competitive. The economists worry that without reform, Japan could slide back into the deflation mode that had dogged it for more than a decade.

Nicknamed the “third arrow” of Mr. Abe’s economic policy, these include efforts to make the labor market more flexible, improve productivity in the service sector and bring more women into the work force. Under a growth strategy laid out in June, Mr. Abe also set the goal of creating special economic zones that would relax some regulation and attract foreign investors.

Many of the plans laid out in June, however, lack detail and risk being watered down, analysts said. Similarly, plans to lower corporate taxes — a move seen as crucial to bolstering Japan’s competitiveness and encouraging more foreign companies to bring operations to the country — will not be completed until December.

“There is a sense that the series of strong announcements earlier has been replaced by mere holding statements,” said Gary Dugan, chief investment officer for Asia and the Middle East for the wealth management company Coutts.

The third arrow of the recovery plans seems to be “veering off target,” he said. “We have scaled back our optimism on Japanese equities until there are clearer signs that measures to help the economy are being brought back on track.”

Izumi Devalier, Japan economist at HSBC, said, “The third arrow has not even been fired yet.” She said, “Investors were hoping for really game-changing chances. But that’s not how politics works in Japan. You need to build a consensus between cabinet and the bureaucracy.”

The likelihood now, she said, is that “there is not going to be a lot of progress on the third arrow in the next few months.” Another problem is that the economic improvement of the last year has yet to directly affect many of Japan’s households. Although the job market is tight and unemployment is low, companies have so far largely resisted making large investments or raising salaries.

Government data released on Thursday underlined this point. Workers’ total earnings edged up just 0.1 percent in September, compared with a year earlier, and summer bonus payments, an important indicator of whether companies are willing to pay more, rose just 0.3 percent.

Consumer prices rose 0.7 percent in September, compared with a year earlier. That means real wages actually fell, Masamichi Adachi, an economist at JPMorgan in Tokyo, said in a research note. “While there is anecdotal information that labor shortages are pushing up the wages of certain types of workers” including construction-related workers and part-timers, he wrote, “average wages remained weak.”

And even though the wages of large companies are likely to increase in the next fiscal year along with profits, “it looks difficult to see a material rise in the average wages of all workers in the near future.”

Eric Pfanner and Makiko Inoue contributed reporting from Tokyo.

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Recession Reverses California Airport’s Growth

The greatest inconvenience awaits those who head to the taxi stand: sometimes there are no cabs. One has to be called.

“Truthfully, I love this,” Annette Long said as she prepared to check her bags for a recent flight, thrilled to be missing the freeway traffic and crowds she encounters flying out of Los Angeles International Airport. “It’s so easy.”

But what makes traveling so pleasant for passengers like Ms. Long also underscores the problem facing this regional airport, which, like the Inland Empire region that it serves, is still reeling from the devastating impact of the recession.

As airports show slow but steady signs of recovery, with passenger traffic nearing pre-recession levels nationally, the passenger traffic at Ontario has plummeted 40 percent since its 2007 peak of 6.9 million, according to Federal Aviation Administration figures. The decline, fed by a confluence of economic misfortune, a change in airline business practices and local political turf wars, is projected to continue through the end of the year. It has left Ontario with traffic levels around four million, about what they were in the mid-1980s, a decade before construction of two modern terminals that were supposed to make this airport a linchpin of the region’s economic growth.

But like the housing booms and busts that have driven the economic prospects of the area over the last 25 years, the airport’s plight has left some to wonder if such ideas were too speculative.

Ontario’s experience mirrors that of other smaller airports in large markets — like Islip and Newburgh in New York — which expanded to handle added traffic only to see airlines pull back. The Inland Empire, which includes San Bernardino and Riverside Counties, continues to be one of the fastest-growing regions in California, with more than four million residents, but the lure is affordable housing, not high-paying jobs. The region is projected to have a double-digit unemployment rate through 2015. And last week, a judge cleared the way for the city of San Bernardino to declare bankruptcy.

“With the benefit of hindsight, it might have been overreaching when they expanded,” said Sampath Rajagopala, a professor of data sciences and operations at the University of Southern California’s business school. “Airlines can never operate at a profit if they rely on consumer business. They need business passengers. Yes, there are a lot of people living there, but they are a lot more price-sensitive.”

It is not just the economy that has crippled the Ontario airport. There has been a change in the way airlines operate, analysts say, prizing profitability now more than market share, which has driven airlines away from smaller airports to larger ones nearby.

Southwest Airlines, the main tenant at Ontario, began there in 1985 with five daily flights to Phoenix. It once flew 64 flights a day from Ontario in the late ’90s, but is now down to 35 flights a day. An additional reduction of 12 percent has been announced for January. At the same time, it has expanded service at Los Angeles International.

Brad Hawkins, a Southwest spokesman, said that cost “is by far the most important determinant in how we operate.” The company’s service to Ontario, he said, “is where it should be.”

This has left Ontario with a conundrum: declining flights mean that airports must charge airlines higher fees per passenger to recoup expenses, and Ontario’s fee of $11.12 per passenger was close to the $12.18 that Los Angeles International charged in the 2012-13 fiscal year, according to airport officials who set the fees.

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Economists Lower Sights on Growth

WASHINGTON — Wholesale inventories in the United States fell unexpectedly for a second straight month in June, prompting economists to trim their second-quarter economic growth estimates.

The Commerce Department said on Friday that wholesale inventories fell 0.2 percent after declining 0.6 percent in May.

This was weaker than the government had assumed in its advance estimate of the second-quarter gross domestic product published last week, which put growth at a 1.7 percent annual pace.

Inventories are a crucial component of G.D.P. changes. As a result of the unexpected decline in stocks at wholesalers in June, economists pared their estimates for second-quarter G.D.P. growth by one-tenth of a percentage point.

They had raised their estimates to as high as a 2.5 percent pace after manufacturing inventories in June came in slightly higher and the United States trade deficit narrowed more than the government had estimated in its first G.D.P. reading.

Jim O’Sullivan, chief United States economist at High Frequency Economics in Valhalla, N.Y., said the June wholesale data “subtract a little from the likely upward revision to second-quarter real G.D.P. growth.”

Barclays lowered its second-quarter G.D.P. estimate to a 2.4 percent pace from 2.5 percent. JPMorgan now expects growth will be revised to a 2.2 percent rate instead of 2.3 percent.

Wholesale inventories in June were pulled down by auto stocks, which tumbled 1.5 percent, the most since December. Stocks of electrical goods, hardware, paper, metals and apparel also fell.

“This softer inventory accumulation in the second quarter is modestly favorable for third quarter growth,” said Daniel Silver, an economist at JPMorgan in New York.

Sales at wholesalers rose 0.4 percent in June after increasing 1.5 percent in May. The rise in June was below economists’ expectations for a 0.7 percent gain.

Trade Gap Falls, Hinting At Pickup in U.S. Growth

The Commerce Department said on Tuesday that the United States trade gap fell more than 22 percent, to $34.2 billion, in June from May. That is lowest level since October 2009.

American companies shipped more aircraft engines, telecommunications equipment, heavy machinery and farm goods. As a result, exports rose 2.2 percent to a record high of $191.2 billion.

Imports declined 2.2 percent to $225.4 billion, in part because oil imports fell to the lowest level in more than two years.

Economists said the steep drop in the trade deficit would most likely lead the government to revise its economic growth estimate for the April-June quarter.

“We could see a sizable upward revision,” said Jennifer Lee, a senior economist at BMO Capital Markets.

Last week the government said the economy grew at a lackluster 1.7 percent annual rate in the second quarter, in part because trade cut nearly a full percentage point from growth.

But after seeing the June trade figures — which were not factored into last month’s growth estimate — some economists said growth could be closer to a 2.5 percent annual rate. The government reports its second estimate of growth for the April-June quarter on Aug. 29.

A smaller trade deficit lifts economic growth because it means consumers and businesses are spending less on foreign goods than companies are taking in from overseas sales.

Many economists say they think overall growth has started to rebound in the July-September quarter. Some say growth could come close to a 3 percent annual rate. A crucial reason is that several export markets, including Europe, are seeing improvement.

For June, United States exports to the 27-nation European Union rose 1.5 percent. That helped shrink the deficit with the region to $7.1 billion.

The deficit with China fell 4.3 percent, to $26.6 billion, while America’s deficit with Japan rose 2.2 percent, to $5.5 billion in June.

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U.S. Cuts Take Increasing Toll on Job Growth

The Labor Department reported on Friday that the economy continued to add jobs in July and that the unemployment rate fell to 7.4 percent, from 7.6 percent. But the pace of job growth slowed somewhat from the first half of the year and remains modest enough that the economy is years away from a full recovery.

Contributing to the hangover from the worst financial crisis in decades is a wave of cuts in domestic and military spending, known collectively as the sequester, which is causing government furloughs as well as job losses and curtailed hours among federal contractors.

Although the sequester became law on March 1, some of the effects, like the forced leaves, have begun to ramp up only recently. More job losses, rather than shorter workweeks, are predicted if the cuts remain in place into next year.

Congress left on Friday for a summer recess of more than a month, after a week in which Republicans’ divisions with one another and with President Obama suggested a new budget showdown may be coming in the fall. The disagreements leave no clear way to end the spending cuts that continue to slow the economy and could even lead to a more damaging government shutdown in October.

Corporate and academic economists say that Washington’s fiscal fights have produced budget policies that amount to a self-inflicted drag on the economy’s recovery.

Joseph J. Minarik, director of research at the corporate-supported Committee for Economic Development and a former government economist, said he could not remember in postwar times when fiscal policy was so at odds with the needs of the economy.

“The macroeconomic situation is highly unusual,” he said, adding: “We have to be concerned about our debt getting totally out of hand, so we are concerned about the federal budget. But the concern has got to be tempered by the fact that we have got to get some economic growth going as well.”

The effects of the cuts could be found in the details of Friday’s jobs report. Although federal government employment did not decline in July as it had in previous months this year, the number of people who were working part time because they could not get their employers to give them full-time hours rose significantly. This probably reflects decisions by many government agencies to achieve their required budget cuts by forcing employees to take unpaid leave.

At the Department of Defense, for example, 650,000 civilians must take off 11 days without pay — generally once a week — through September, when the current fiscal year ends. The Internal Revenue Service likewise scheduled one furlough day a month from May through August.

On her first day at the Office of Management and Budget, Mr. Obama’s new budget director, Sylvia Mathews Burwell, sought to meet employees and found many desks empty because it was a furlough day. And the new trade representative, Michael Froman, has struggled during his office’s budget cuts to assign government lawyers to various negotiations abroad.

In the private sector, employment at government contractors also appears to be falling as companies that do government research, provide custodial services and retrofit federal properties to be more energy-efficient, among other things, are informed of contract cancellations or delays in bids for new contracts — partly because the federal workers arranging the bidding are being furloughed.

“The disjunction between textbook economics and the choices being made in Washington is larger than any I’ve seen in my lifetime,” said Justin Wolfers, an economics professor at the Gerald R. Ford School of Public Policy at the University of Michigan. “At a time of mass unemployment, it’s clear, the economics textbooks tell us, that this is not the right time for fiscal retrenchment.”

Given that rough consensus in an otherwise quarrelsome profession, he added, “To watch it be ignored like this is exasperating, horrifying, disheartening.”

After the release of the jobs report, the first thought of many business forecasters was of the Federal Reserve, and what the data might suggest for its next move in September, when analysts believe it probably will begin tapering its stimulus measures known as quantitative easing. As the Fed chairman, Ben S. Bernanke, has made clear — including repeatedly to Congress — the Fed has continued its stimulus policies in part to offset the drag from fiscal policy.

Jackie Calmes reported from Washington, and Catherine Rampell from New York.

U.S. Adds 162,000 Jobs as Growth Remains Sluggish

The unemployment rate, which comes from a different survey, gave a more encouraging signal, edging down to 7.4 percent from 7.6 percent in June. But the improvement was only partly a result of more people getting jobs. More people also dropped out of the labor force. The unemployment rate refers only to people who are actively looking for work.

While the jobs report was lackluster, particularly compared to expectations that the economy might add closer to 200,000 jobs, many economists said the latest data was unlikely, on its own, to cause Federal Reserve officials to back away from plans to begin easing its stimulus policies. Ben S. Bernanke, chairman of the Fed, has said that the central bank would start reducing its monthly purchases of Treasuries and mortgage-backed securities “later this year.” Many Wall Street analysts have interpreted that comment as pointing to action as early as the Fed’s meeting in September.

“The payroll numbers were a little disappointing, but the Fed has said it’s more interested in the unemployment rate than the payroll numbers,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. He noted that the Fed’s own forecasts put the unemployment rate around 7.2 to 7.3 percent at the end of this year, not far below the July level. Referring to inflation, he said, “If anything, today’s numbers would harden my view if I were a hawk and persuade me to become more hawkish if I were wavering.”

Not everyone agreed with that view, with several analysts suggesting the Fed might wait until December to take its first step. The mixed signals from July’s jobs report will most likely focus even more attention on August’s jobs snapshot, the last before the Fed’s next meeting, scheduled for the middle of September.

“The committee needs to see more data on macroeconomic performance for the second half of 2013 before making a judgment on this matter,” James Bullard, president of the Federal Reserve Bank of St. Louis and one of the members of the Fed committee that sets interest rates who is more dovish on inflation, said in a speech on Friday.

Other indicators also painted a somewhat darker picture of the economy and the job market than was evident from reports earlier this year, with both average hourly wages and the length of the private sector workweek shrinking modestly in July. The job gains reported on Friday were concentrated in retail, food services, financial activities and wholesale trade, according to the Labor Department. Manufacturing gained 6,000 jobs, the first improvement since February, although economists caution that the timing of auto plant shutdowns in the summer can distort the numbers.

July represented the 34th consecutive month of job creation, but the latest pace of employment gains is still far below what would be needed to absorb the backlog of unemployed workers anytime soon. At the roughly 192,000-a-month average rate of job growth so far this year, it would take more than seven years to close the so-called jobs gap left by the recession, according to the Hamilton Project at the Brookings Institution. There are now 11.5 million Americans looking for work who cannot find it. That figure nearly doubles when two other groups of “underemployed” workers are taken into account: people who want to work but have stopped looking, and people who are working part time because they cannot secure full-time jobs. The number of Americans in so-called involuntary part-time employment has barely budged in recent years, and the total for July 2013 was exactly the same as a year earlier.

For these unemployed and underemployed workers, the social safety net that has been supporting them has frayed as a result of federal, state and local budget cuts.

“I honestly didn’t think it would be this hard,” said Keith Aiken, 38, who moved into a homeless shelter in Greensboro, N.C., about a month ago. His employer of more than a decade, a group home for people with disabilities, shut down last August, and he has been looking for work ever since.

After state officials ended North Carolina’s eligibility for federal unemployment benefits last month, Mr. Aiken’s benefits stopped and he was no longer able to pay his rent.

“Hopefully, something will come open pretty soon,” he said, noting that he was looking into contract labor in Iraq or Afghanistan. “I like to think I’m down but not quite out yet.”

The outlook for hiring is unclear, particularly since even the moderate rates of job growth in recent months do not seem justified by the weak gains in economic output. The nation’s gross domestic product grew at an annual rate of 1.7 percent in the second quarter and 1.1 percent in the first quarter, much slower than would be predicted from recent hiring trends.

Economic output and job growth seem unlikely to stay decoupled for too long, some economists say, in which case output growth should start to pick up, or job growth should start to slow, or both.

“I think with the economy showing 1 percent growth on average over the last three quarters, you’re locked into 150,000 jobs per month for the rest of this year,” said Steven Ricchiuto, chief United States economist at Mizuho Securities.

One other possible explanation for the seemingly incongruous trends in job and output growth is the mix of jobs being created.

“It’s a lot of temp services, retail, food services, health care,” said Joshua Shapiro, chief United States economist at MFR Inc.

“With low-end jobs contributing more than half the growth, the income generated would be not that great, and you wouldn’t be expecting it to drive strong consumer spending.”

Nelson D. Schwartz and Binyamin Appelbaum contributed reporting.

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G-20 Ministers Aim for More Job Growth

“Growth and creating jobs remains our priority,” the statement from the finance ministers and central bank governors of the Group of 20 countries said.

It added that the governments in the organization, which collectively represent about 90 percent of the world’s economic activity, “are fully committed to taking decisive actions to return to a robust, job-rich growth path.”

Previous communiqués issued after such meetings had also indicated policy support among some member governments to focus on balancing budgets, not just spending to get out of recession. In this light, Saturday’s statement suggested the weight of policy consensus in large governments was shifting toward continued stimulus.

While not openly critical of austerity measures like the across-the-board automatic federal budget cuts in the United States, the statement suggested most governments see recovery as too weak to risk reducing spending on unemployment benefits, job training, education and other public sector outlays.

Not even Germany objected to the new wording, said a senior Treasury Department official who attended the two days of meetings in Moscow.

“The debate between growth and austerity seems to have come to an end,” the official said.

The benefits of the American pro-growth fiscal policies tapered only after the automatic cuts known as sequestration kicked in earlier this year. The efforts of the G-20 to coordinate economic policy are intended to help the world recover from the recession that began in 2007.

The officials also discussed strategies for ending central bank monetary stimulus, like the bond-buying program known as quantitative easing in the United States, without causing turmoil on financial markets.

Anton Siluanov, the finance minister of Russia, which is hosting the meeting, spoke in a final news conference about the tremor that American monetary policy is sending through emerging markets like Russia.

A suggestion last month by Ben S. Bernanke, the chairman of the Federal Reserve, that the United States economy may recover sufficiently this year to wind down the bond-buying program caused a sell-off in emerging market bonds.

With United States Treasury rates rising in response to Mr. Bernanke’s comment, investors no longer saw the benefit of taking the extra risk of putting money in government bonds issued by wobbly emerging markets like Russia.

“We had an experience where just a comment that quantitative easing could end wound up seriously affecting developing economies,” Mr. Siluanov told journalists.

The joint statement sets the stage for a G-20 summit meeting in St. Petersburg in September. It suggested that leaders including President Obama would similarly play down concerns about deficits in light of continued weakness in the global economy during an uneven recovery: demand remains weak in China and Europe while growth in the United States is anemic.

The officials discussed efforts to stimulate demand in China. Beijing has removed a floor on interest rates banks can charge, which could lower rates and encourage business activity and spending.

G-20 Ministers Aim for More Job Growth

“Growth and creating jobs remains our priority,” the statement from the finance ministers and central bank governors of the Group of 20 countries said.

It added that the governments in the organization, which collectively represent about 90 percent of the world’s economic activity, “are fully committed to taking decisive actions to return to a robust, job-rich growth path.”

Previous communiqués issued after such meetings had also indicated policy support among some member governments to focus on balancing budgets, not just spending to get out of recession. In this light, Saturday’s statement suggested the weight of policy consensus in large governments was shifting toward continued stimulus.

While not openly critical of austerity measures like the across-the-board automatic federal budget cuts in the United States, the statement suggested most governments see recovery as too weak to risk reducing spending on unemployment benefits, job training, education and other public sector outlays.

Not even Germany objected to the new wording, said a senior Treasury Department official who attended the two days of meetings in Moscow.

“The debate between growth and austerity seems to have come to an end,” the official said.

The benefits of the American pro-growth fiscal policies tapered only after the automatic cuts known as sequestration kicked in earlier this year. The efforts of the G-20 to coordinate economic policy are intended to help the world recover from the recession that began in 2007.

The officials also discussed strategies for ending central bank monetary stimulus, like the bond-buying program known as quantitative easing in the United States, without causing turmoil on financial markets.

Anton Siluanov, the finance minister of Russia, which is hosting the meeting, spoke in a final news conference about the tremor that American monetary policy is sending through emerging markets like Russia.

A suggestion last month by Ben S. Bernanke, the chairman of the Federal Reserve, that the United States economy may recover sufficiently this year to wind down the bond-buying program caused a sell-off in emerging market bonds.

With United States Treasury rates rising in response to Mr. Bernanke’s comment, investors no longer saw the benefit of taking the extra risk of putting money in government bonds issued by wobbly emerging markets like Russia.

“We had an experience where just a comment that quantitative easing could end wound up seriously affecting developing economies,” Mr. Siluanov told journalists.

The joint statement sets the stage for a G-20 summit meeting in St. Petersburg in September. It suggested that leaders including President Obama would similarly play down concerns about deficits in light of continued weakness in the global economy during an uneven recovery: demand remains weak in China and Europe while growth in the United States is anemic.

The officials discussed efforts to stimulate demand in China. Beijing has removed a floor on interest rates banks can charge, which could lower rates and encourage business activity and spending.

U.S. Wholesale Inventories Fall, Likely Drag on GDP Growth

The Commerce Department said on Wednesday wholesale inventories dropped 0.5 percent during the month, confounding the expectations of analysts polled by Reuters, who expected an increase.

The data reinforces the view that U.S. economic growth could slow in the April-June period after expanding at a lacklustre 1.8 percent annual rate in the first quarter. Deep federal budget cuts, which have trimmed wages for federal workers, are seen biting into growth until around the end of the year.

The decline in inventories in May was the sharpest since September 2011. However, sales were stronger than expected, rising 1.6 percent.

The government also revised its estimate for inventories in April to show a 0.1 percent decline rather than a previously reported modest increase.

Inventories are a key component of gross domestic product changes. They added more than half a percentage point to first-quarter GDP growth.

The declines in inventories during May were broad based, from long lasting manufactured goods to groceries and farm products. The fall in durable goods stocks was the largest since December 2009.

U.S. stocks opened little changed as traders awaited the minutes from the June Federal Reserve policy meeting, which will be released later on Wednesday. U.S. Treasuries were steady, while the euro extended gains against the dollar.

In recent weeks, interest rates have been rising sharply as the Fed prepares to reduce its extraordinary monetary stimulus.

Last week, mortgage rates rose to their highest level in two years, weighing against demand from potential homeowners, data from an industry group showed.

Interest rates on fixed 30-year mortgages rose for the ninth week in a row to average 4.68 percent in the week ended July 5, the Mortgage Bankers Association said. It was the highest level since July 2011 and a 10 basis point increase over the week before.

The surge in costs has been expected to push some undecided buyers into the market as they rush to lock in rates before they rise even more, but MBA's seasonally adjusted gauge of loan requests for home purchases fell 3.1 percent, the second straight week of declines.

Rates have been rising since early May, and the increase accelerated after comments from Fed Chairman Ben Bernanke last month that the U.S. central bank expects to wind down the pace of its quantitative easing program later this year if the economy improves as expected.

(Reporting by Jason Lange; Additional reporting by Leah Schnurr in New York)

As U.S. Trade Deficit Grows, Some Growth Forecasts Drop

The trade deficit rose to $45 billion in May, up 12.1 percent from $40.1 billion in April, the Commerce Department said on Wednesday. It was the largest trade gap since November.

Exports slipped 0.3 percent to $187.1 billion. Sales of American farm products dropped to their lowest point in more than two years. American exports have been hurt by recessions in many European countries.

Imports rose 1.9 percent to $232.1 billion. Imports of autos and other nonpetroleum products rose widely.

The trade deficit is running at an annual rate of $501.2 billion, 6.3 percent lower than last year’s deficit.

Paul Dales, senior United States economist at Capital Economics, said the larger trade deficit for May indicated that economic growth in the second quarter could be even weaker than the sluggish 1.5 percent annual rate that he had forecast.

Economists at Barclays said the higher deficit led them to downgrade their growth forecast for the second quarter to 1 percent, from 1.6 percent.

The American economy expanded at an annual rate of only 1.8 percent in the first three months of the year.

For May, exports to the European Union were up 6.4 percent. But over the last five months, exports to this region have declined 6.3 percent from the same period in 2012. Europe has been hurt by a prolonged debt crisis, which has led to recessions across the Continent.

The United States trade deficit with China jumped 15.6 percent to $27.9 billion in May. That is close to the monthly high set in November. So far this year, the trade deficit with China, the largest with any country, is running 3 percent higher than last year.

Consumer Sentiment and Factory Data Point to Moderate Growth

While other data on Friday showed wholesale prices jumped in May as gasoline and food prices rebounded, underlying inflation pressures were muted.

The reports come ahead of a Federal Reserve meeting next week where policymakers will discuss whether and when to start scaling back their $85 billion a month pace of bond buying.

Though the economy is showing resilience in the face of tighter fiscal policy in Washington, the pace of growth is unspectacular and inflation is well below the central bank's 2 percent target.

"The Fed is likely to maintain its current pace of securities purchases until later in the fall. There is no sign of inflation and growth is still moderate," said Gus Faucher, senior economist at PNC Financial Services Group in Pittsburgh.

The Thomson Reuters/University of Michigan's preliminary index on consumer sentiment fell to 82.7 in June after touching a near six-year high of 84.5 in May.

June's reading was the second highest in the last eight months, suggesting Americans were far from gloomy about their long-term prospects.

"The proximity of the headline index to cycle highs continues to suggest that consumer attitudes remain positive, a likely positive factor for future consumer spending," said Gennadiy Goldberg, an economist at TD Securities in New York.

DOMESTIC DEMAND HELPING FACTORIES

While households appear to be weathering tighter fiscal policy, helped in part by rising home prices, the factory sector has taken a beating from spending cuts. It has also suffered from a recession in Europe that is weighing on global growth.

In a separate report, the Fed said factory output edged up 0.1 percent last month after two back-to-back declines. Overall industrial production was unchanged, held back by a big drop in utilities output.

"The slight improvement in May suggests improving domestic demand is helping offset the negative impact on exports of recent softening in overseas demand," said Ted Wieseman, an economist at Morgan Stanley in New York.

Separately, the Labor Department said the producer price index, a gauge of prices received by the nation's farms, factories and refineries, rose 0.5 percent in May after declining 0.7 percent in April.

Excluding volatile food and energy costs, however, wholesale ticked up only 0.1 percent for a second straight month.

In the 12 months through May, this so-called core PPI advanced 1.7 percent, the same as in April and March. The overall PPI was also up 1.7 percent after rising 0.6 percent in the period through April.

U.S. financial markets were little moved by the reports, with attention shifting to the Fed's meeting on Tuesday and Wednesday. Stocks on Wall Street were trading lower, while prices for U.S. government debt rose. The dollar was little changed against a basket of currencies.

Wholesale gasoline prices increased 1.5 percent last after dropping 6.0 percent in April, boosting energy prices. Energy prices accounted for more than 60 percent of the rise in PPI last month.

A record jump in egg prices pushed up food prices by 0.6 percent. The cost of food had dropped 0.8 percent in April. Egg prices accounted for 60 percent of the rise in the wholesale food index last month.

An increase in light truck prices accounted for almost two-thirds of the rise in core PPI in May.

"Producers are complaining that they have been unable to pass any increases in energy or food prices along to consumers," said Diane Swonk, chief economist at Mesirow Financial in Chicago. "The result is an inflation rate that falls short of a healthy buffer zone for the overall economy."

(Reporting by Lucia Mutikani, Additional reporting by Paige Gance in Washington and Leah Schnurr in New York; Editing by Andrea Ricci, Tim Ahmann and Chizu Nomiyama)