WASHINGTON: US economic growth slowed in the second quarter, the government confirmed on Thursday, but the strongest consumer spending in 4-1/2 years amid a solid labour market threw cold water on financial market expectations of a recession. Signs that the economy was growing at a moderate pace and not slowing rapidly were underscored by other data showing a narrowing in the goods trade deficit in July as exports rebounded. Businesses stepped up inventory accumulation last month, likely in anticipation that demand would remain strong. Consumers have so far shown no signs of pulling back, with retail sales powering ahead in July. But there are fears the Trump administration’s year-long trade war with China, which will see additional tariffs on Chinese goods coming into effect in September and December, could take the sails out of consumer spending.
“The economy is still on cruise control and growing at a slow but steady pace that looks sustainable as the trade wind skies continue to darken,” said Chris Rupkey, chief economist at MUFG in New York. Gross domestic product increased at a 2.0 percent annualised rate, the government said in its second reading of second-quarter GDP on Thursday.
That was a downward revision from the 2.1 percent pace estimated last month. The small downgrade was in line with economists’ expectations. The economy grew at a 3.1 percent rate in the January-March quarter. It expanded 2.6 percent in the first half of the year. The dollar rose against a basket of currencies, while US Treasury prices fell. Stocks on Wall Street rose, boosted in part by a hopeful tone from China on a resolution of the trade dispute with Washington. When measured from the income side, the US economy grew at a 2.1 percent rate in the second quarter. Gross domestic income (GDI) increased at a 3.2 percent pace in the JanuaryMarch quarter.
The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, rose at a 2.1 percent rate last quarter, slowing from a 3.2 percent pace of growth in the first three months of the year. The income side of the growth ledger was supported by a rebound in profits after two straight quarterly declines. After-tax profits without inventory valuation and capital consumption adjustment, which correspond to S&P 500 profits, increased at a 4.8 percent rate after dropping 1.5 percent in the first quarter.
The economy is largely losing speed as the stimulus from the White House’s $1.5 trillion taxcut package and a government spending blitz fades. Economists are forecasting growth this year around 2.5 percent, below the Trump administration’s 3 percent target. The US-China trade war has weighed heavily on manufacturing and business investment, which contracted in the second quarter.
That is expected to keep the Fed on track to cut interest rates by another quarter-percentage-point cut next month. The Fed lowered its short-term interest rate by 25 basis points last month for the first time since 2008, citing trade tensions and slowing global growth. But the economy appears to have maintained its moderate pace of growth early in the third quarter. In another report on Thursday, the Commerce Department said the goods trade deficit narrowed 2.5 percent to $72.3 billion in July as exports rebounded. Exports of goods rose 0.7 percent as an acceleration in shipments of motor vehicles, capital and consumer goods offset a plunge in industrial supplies and agricultural exports.
The decline in agricultural shipments probably reflects a drop in soybean exports to China. Goods imports fell 0.4 percent last month, led by a sharp drop in capital goods. Weak capital goods imports suggests business investment could remain subdued after contracting in the second quarter for the first time since the first quarter of 2016.
Growth in consumer spending, which accounts for more than twothirds of US economic activity, surged at a 4.7 percent rate in the second quarter. That was the fastest since the fourth quarter of 2014 and was an upward revision from the 4.3 percent pace estimated last month. Consumer spending is being driven by the lowest unemployment rate in nearly 50 years.
A report from the Labour Department on Thursday showed the number of Americans filing for state unemployment benefits increased slightly last week. The GDP report showed the trade deficit widened to $982.5 billion in the second quarter instead of $978.7 billion as reported last month. Trade cut 0.72 percentage point from GDP growth last quarter instead of 0.65 percentage point as previously reported. – Reuters
