The US economy grew far less than expected in the second quarter as inventory investment fell for the first time in almost five years, but a surge in consumer spending pointed to underlying strength. Without the inventory cutbacks, the economy would have grown at 2.4 percent in the second quarter – on par with market expectations.
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GDP rose at a 1.2% annualized rate after a grim 0.8% advance in Q-1, US Commerce Department figures showed Friday. Economists say uncertainty over global demand and the upcoming USA presidential election are also making companies cautious about spending.
“The US economy just went through a meaningful inventory correction cycle”, said Harm Bandholz, chief US economist at UniCredit Research in NY. Consumer spending and exports rose, unemployment was down and the economy was generally thought to be plugging along at a decent clip. The economy remains vulnerable to downside risks.
“We’ve made great progress on refining our seasonal-adjustment process”, Brian Moyer, director at the Commerce Department’s Bureau of Economic Analysis, told reporters in Washington this week.
Nor do companies show any sign they soon plan to ramp up investment, one of the three main pillars of economic growth. There is yet more evidence to support this, though, as Q4 estimates were revised from 1.4 percent to 0.9 percent and 0.8 percent from 1.1 percent in Q1. Consumption spending grew by $190.1 billion during the second quarter of 2016, compared to $59.2 billion during the first quarter.
Economists’ Q-2 estimates for GDP, or the value of all goods and services produced, ranged from 1 to 3.2%.
USA economic growth was unexpectedly tepid in the second quarter. At the same time, leaner inventories could set the stage for a pickup in production later this year should demand hold up.
Growth for the first quarter was revised down from 1.1% to 0.8%.
Trade was a slight positive in the second quarter, adding 0.2 percentage points to growth.
Business investment declined at a 9.7% annual rate in the second quarter, much worse than the 3.3% drop off in the previous quarter. Wall Street economists had forecast the pace would tick up to 2.5 per cent in the second quarter.
The new GDP report may be used by both Democrats and Republicans to try to score political points.
During the latest three-month period, growth was also trimmed because businesses slowed in their stockpiling of goods that are waiting to be sold. That was the most since the third quarter of 2010 and marked the first decrease in two years. It’s just that weak business and government spending proved to be a major drag. States and municipalities also cut back. “Core” inflation climbed at a 1.7% rate if the volatile food and energy categories are stripped out.
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After a string of solid economic numbers from the USA and geopolitical tensions abating, the Federal Reserve signaled that an interest rate hike in 2016 was a possibility at its monetary policy meeting on Wednesday, but after todays report odds of a hike have fallen sharply.
