The US economy grew at a pace of 1.2 percent in the second quarter of 2016, worse than analysts’ expectations of 2.5 percent. The median forecast of economists surveyed by called for an optimistic 2.5% Q-2 increase.
Advertisement
The soft pace of growth could also complicate plans of the Federal Reserve to raise interest rates later this year, perhaps as early as September.
Here is why you need to anxious about the second quarter’s low growth reading.
However, some experts believe the drag from inventories is beginning to wear off and shouldn’t affect the economy much more for the rest of the year. He confirmed that the Fed is acting appropriately by being cautious.
But then on Friday, after the gathering had ended, the Commerce Department said the economy grew at only 1.2 percent during April, May and June.
As the US consumer gained confidence in the second quarter of 2016, data from the Commerce Department released Friday showed businesses investment didn’t quite keep up.
The three straight quarters of growth rates around 1 percent suggest a significant loss of momentum that puts the economy at the risk of stalling, but economists expect an acceleration in the second half against the backdrop of strong consumption. That could begin in the second half of the year just as steadier oil prices bring relief to the energy sector and the downward pressure from the dollar’s 2015 surge diminishes.
In a year when the Fed was supposed to be on an orderly rate-hike pace of one per quarter, Wall Street now is talking about an economy that’s not going anywhere and a central bank that will follow suit.
Economists polled by Reuters had forecast GDP growth rising at a 2.6 percent rate in the past quarter. It will publish two revised estimates over the next two months. This is the third consecutive quarter of sluggish growth. At the same time, leaner inventories could set the stage for a pickup in production later this year should demand hold up.
Consumer spending increased at a 4.2pc rate – the fastest since the fourth quarter of 2014 and accounting for the rise in GDP growth in the second quarter.
Investments in new equipment have now fallen in five of the last seven quarters, and spending on new structures has contracted in six of the last eight.
Stripping out these pieces of the GDP calculation gives economists a better sense of domestic demand. Last quarter there was a resilient performance, but businesses are still cautions. This also marks the third straight quarterly drop. Residential spending was also weaker in this report, down 6.1 percent, even as the longer-term trend has been more encouraging. States and municipalities also cut back.
Advertisement
Jason Furman, chairman of the president’s Council of Economic Advisers, said the report “underscores that there is more work to do” and said the Obama administration would keep pursuing policies to strengthen growth and boost living standards.
