The US economy slows but other factors show recession unlikely
Growth in consumer spending, which accounts for more than two-thirds of US economic activity, surges 4.7%
Washington — The US economy slowed in the second quarter, but the strongest growth in consumer spending in four-and-a-half years amid a strong labour market could further temper financial market expectations of a recession.
GDP increased at a 2.0% annualised rate, the US commerce department said in its second reading of second-quarter GDP on Thursday. That was a downward revision from the 2.1% pace estimated last month.
The economy grew at a 3.1% rate in the January-March quarter. It expanded 2.6% in the first half of the year. The small downward revision was in line with economists’ expectations.
The economic expansion, now in its 11th year, is under threat from the Trump administration’s year-long trade war with China, which has undercut business investment and manufacturing. The deterioration in trade relations between the two economic giants has roiled global stock markets and triggered an inversion of the US treasury yield curve, fanning fears of a recession.
While manufacturing and housing data suggests the economy continued to slow early in the third quarter, strong consumer spending, backed by the lowest unemployment rate in nearly 50 years, has eased some concerns about a downturn.
Federal Reserve chair Jerome Powell told a conference of central bankers last week that the economy is in a “favourable place,” but reiterated that the US central bank will “act as appropriate” to keep the economic expansion on track.
The Fed lowered its short-term interest rate by 25 basis points (bps) last month for the first time since 2008, citing trade tensions and slowing global growth. Financial markets have fully priced in another 25bps cut at the Fed’s September 17-18 policy meeting.
Growth in consumer spending, which accounts for more than two-thirds of US economic activity, surged at a 4.7% rate in the second quarter — the fastest since the fourth quarter of 2014
The economy is also losing speed as the stimulus from the White House’s $1.5-trillion tax-cut package and a government spending blitz fades. Economists are forecasting growth this year of about 2.5%, below the Trump administration’s 3% target.
When measured from the income side, the economy grew at a 2.1% rate in the second quarter. Gross domestic income (GDI) increased at a 3.2% pace in the January-March 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% rate last quarter, slowing from a 3.2% pace of growth in the first three months of the year.
Growth slowing moderately
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% rate after dropping 1.5% in the first quarter.
While the economy is slowing, it appears not to be rapidly losing altitude. In another report on Thursday, the commerce department said the goods trade deficit narrowed 2.5% to $72.3bn in July as exports rebounded. Exports of goods rose 0.7%, while imports fell 0.4%.
The department also reported retail inventories jumped 0.8% in July after falling 0.3% in the prior month. Retail inventories, excluding motor vehicles and parts, the component that goes into the calculation of GDP, rebounded 0.3% last month after dropping 0.2% in June.
US stock index futures held gains after the release of the data while US treasury yields briefly extended their rise. The dollar was trading slightly higher against a basket of currencies.
Growth in consumer spending, which accounts for more than two-thirds of US economic activity, surged at a 4.7% rate in the second quarter — the fastest since the fourth quarter of 2014 and was a slight upward revision from the 4.3% pace estimated last month.
Spending is being driven by a strong labour market. A report from the labour department on Thursday showed the number of Americans filing for state unemployment benefits increased 4,000 to a seasonally adjusted 215,000 last week. The four-week moving average of initial claims, considered a better measure of labour market trends as it irons out week-to-week volatility, slipped 500 to 214,500 last week.
The GDP report showed the trade deficit widened to $982.5bn in the second quarter, instead of $978.7bn as reported last month. Trade cut 0.72 percentage points from GDP growth last quarter instead of 0.65 percentage points as previously reported.
US-China trade tensions have caused wild swings in the trade deficit, with exporters and importers trying to stay ahead of the tariff fight. Growth in inventories was revised down to a $69.0bn rate in the second quarter from the previously estimated $71.7bn pace. Inventories chopped 0.91 percentage points from GDP growth last quarter, instead of 0.86 percentage points as reported in July.
The slowdown in inventory accumulation reflects robust consumer spending and an uncertain economic outlook.
Business investment declined at an unrevised 0.6% rate in the second quarter, the first contraction since the first quarter of 2016. Growth in government investment was revised down. Spending on homebuilding contracted for a sixth straight quarter, the longest such stretch since the Great Recession.