The first read on second-quarter GDP showed the US economy grew at a 1.2% annualized pace, up from a 0.8% growth rate in the first quarter, but far below consensus expectations for a 2.6% pace. The figure shows that companies are cautious about investment and they spent less on buildings and equipment.
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Or perhaps more than anything else, investors know this is another reason for the Fed to remain as dovish and accommodating as its policy mandates will allow it to be. Growth in 2014 was unchanged at 2.4 per cent, while in 2013 GDP grew 1.7 per cent, a little higher than the last estimate.
USA government statisticians have found evidence that efforts to adjust the country’s measure of economic growth for seasonal fluctuations have not been fully successful. Following the conclusion of its meeting on Wednesday, the Federal Reserve said that USA economic activity was expanding at a “moderate rate”.
Despite the probability of a hike falling after the GDP report, San Francisco Fed Chair John Williams said today that the Fed hopes to move rates up in a gradual, predictable way.
Looking more closely at the second quarter data, consumer spending was a bright spot in an otherwise disappointing release.
“US economic growth failed to gain momentum in the second quarter, with a pace of expansion which looks especially underwhelming when looked at in the context of the sluggish start to the year”. The 3% jump in services spending was the most in six quarters, likely aided by improved household finances, continued job growth and firmer wages.
Consumption is by far the main factor driving growth in the quarter, growing at a 4.2 percent annual rate. Growth also was revised down for the fourth quarter of 2015 to 0.9% from 1.4%.
Inventories were reduced by $8.1-B in Q-2, the most since Q-3 of Y 2011 and subtracting 1.16% from the economy.
In the second quarter, consumer spending rose strongly. Current-dollar GDP increased 3.5%, or $155.9 billion, in the second quarter to a level of $18,437.6 billion. And what was already believed to have been a lackluster first quarter was revised even lower – gross domestic product ticked up only 0.8 percent in the first three months of the year. The decrease mainly came from state and local governments, with federal defense spending also pulling that figure lower.
Business spending on equipment contracted for a third consecutive quarter, the longest stretch since the 2007 to 2009 recession, though the pace of decline slowed. The first quarter was previously seen as increasing 1.1% from the prior period. GDP growth hasn’t exceeded four percent in fifteen years – and hasn’t eclipsed the three percent threshold since 2005.
Both Democrats and Republicans used the GDP report to make political points.
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“The US economy just went through a meaningful inventory correction cycle”, said Harm Bandholz, chief US economist at UniCredit Research in NY. He added, “Weakness in business investment is an important and lingering growth constraint”.
