Economic growth in the United States slowed less than experts had expected in the second quarter, as a surge in consumer spending blunted some of the drag from declining exports and a smaller inventory build-up.
The fairly upbeat economic report from the US Department of Commerce on Friday could further soothe concerns about the economy’s health – but will probably not deter the US Federal Reserve from cutting interest rates next Wednesday for the first time in a decade.
Rising risks remain in the economic outlook, especially from a trade war between the US and China. And despite the slightly better-than-expected reading for gross domestic product (GDP), business investment contracted for the first time since early 2016 and housing contracted for a sixth straight quarter.
Earlier this month, Federal Reserve Chairman Jerome Powell flagged business investment and housing as areas of weakness in the economy.
But signs of robust consumer spending – the primary engine of US economic growth – together with the strong labour market are further diminishing expectations of a big interest rate cut and could raise doubts about further monetary policy easing later this year and into the next.
The economy grew at a 2.1 percent annualised rate in the second quarter, according to government figures released Friday. Economists polled by the Reuters news agency had originally forecast a growth rate of 1.8 percent rate in the April-June period.
The economy had grown at an unrevised 3.1 percent pace in the first three months of the year, and is slowing as the stimulus from the White House’s $1.5 trillion tax-cut package fades. The tax cuts – together with more government spending and deregulation – were among the measures adopted by the Trump administration in an attempt to boost annual economic growth to 3.0 percent on a sustained basis.
While the economy grew 2.9 percent in 2018, growth this year is expected to be around 2.5 percent.
Economists generally believe the economy can grow over a long period around two percent without igniting inflation. However, the GDP report showed a pickup in inflation last quarter. A gauge of inflation tracked by the Fed increased at a 1.8 percent rate last quarter, just below the US central bank’s target inflation rate of 2 percent.
Growth in consumer spending, which accounts for more than two-thirds of US economic activity, surged 4.3 percent in the second quarter, the greatest increase since the end of 2017.
Some of the slowdown in consumer spending earlier this year was blamed on a 35-day partial shutdown of the US federal government.
Spending is being supported by the lowest unemployment rate in nearly 50 years, which is slowly lifting wages.
The jump in consumer spending helped to offset some of the weakness from exports, which fell 5.2 percent last quarter, in a reversal of the strong growth experienced in the first three months of the year.
The plunge in exports caused even more deterioration with the trade deficit. As result, trade subtracted 0.65 percentage points from GDP growth last quarter, after contributing 0.73 percentage points in the January-March period.
The acceleration in consumer spending also helped businesses to whittle down an inventory overhang, leading to a smaller inventory build-up.
Inventory investment increased at a $71.7bn rate, slowing from the first quarter’s $116bn pace of increase. While inventories cut 0.86 percentage points from GDP growth in the second quarter, the smaller pace of stock accumulation is a potential boost to manufacturing.
Businesses have been placing fewer orders with factories while working through stockpiles of unsold goods, which contributed to undercutting manufacturing production. Inventories added 0.53 percentage points to GDP growth in the first quarter.
Business investment fell at 0.6 percent in the second quarter, the first contraction since the first quarter of 2016. It was pulled down by a 10.6 percent pace of decline in spending on structures, which includes oil and gas-well drilling.
Growth in government investment accelerated, but spending on home building contracted for a sixth straight quarter.
Spending on intellectual products – including research and development – increased. Business spending on equipment rebounded 0.7 percent in the second quarter. But it is seen as constrained by design problems at aerospace giant Boeing.
Boeing reported its biggest-ever quarterly loss on Wednesday due to the spiraling costs of resolving issues with its 737 MAX airplane. The company warned it might have to halt production of the grounded jet completely if global regulators create new hurdles to getting Boeing’s best-selling aircraft back in the air.
The plane was grounded worldwide in March after two fatal crashes in Ethiopia and Indonesia. Production of the aircraft has been reduced and deliveries have been suspended.