WASHINGTON: US economic growth slowed less than expected in the second quarter as a surge in consumer spending blunted some of the drag from declining exports and a smaller inventory build, which could further allay concerns about the economy’s health.
The fairly upbeat report from the Commerce Department on Friday will probably not deter the Federal Reserve from cutting interest rates next Wednesday for the first time in a decade, given rising risks to the economy’s outlook, especially from a trade war between the United States and China.
Despite the better-than-expected GDP reading, business investment contracted for the first time in more than three years and housing contracted for a sixth straight quarter. Fed Chairman Jerome Powell early this month flagged business investment and housing as areas of weakness in the economy.
But robust consumer spending, together with a strong labor market, further diminish expectations of a 50 basis point rate cut and could raise doubts about further monetary policy easing this year.
Gross domestic product increased at a 2.1% annualized rate in the second quarter, the government said. The economy grew at an unrevised 3.1% pace in the January-March quarter. Economists polled by Reuters had forecast GDP increasing at a 1.8% rate in the second quarter.
The economy has expanded for 10 years, the longest run in history. Activity is slowing largely as the stimulus from the White House’s $1.5 trillion tax cut package fades. The tax cuts together with more government spending and deregulation were part of measures adopted by the Trump administration to boost annual economic growth to 3.0% on a sustained basis.
The economy grew 2.9% in 2018 and growth this year is expected to be around 2.5%. Economists estimate the speed at which the economy can grow over a long period without igniting inflation at between 1.7% and 2.0%.
The GDP report showed a pickup in inflation last quarter, though the trend remained benign. A gauge of inflation tracked by the Fed increased at a 1.8% rate last quarter, just below the US central bank’s 2% target. Inflation increased 1.5% compared the second quarter of 2018.
The government also published revisions to GDP data from 2014 through 2018. The updated data showed growth in the second and third quarters of last year was not as robust as previously estimated, and the economy grew much more slowly in the fourth quarter than had been reported in March. Revised price data showed moderate inflation last year.
The dollar extended gains versus a basket of currencies after the data, while prices for US Treasury fell. US stock index futures pared gains.