US economy slows in second quarter; consumer spending robust

green and white leafed plantsWASHINGTON: The U.S. economy slowed in the second quarter, but the strongest growth in consumer spending in 4-1/2 years amid a strong labor market could further temper financial market expectations of a recession.

Gross domestic product increased at a 2.0per cent annualized rate, the Commerce Department said in its second reading of second-quarter GDP on Thursday. That was a downward revision from the 2.1per cent pace estimated last month.



The economy grew at a 3.1per cent rate in the January-March quarter. It expanded 2.6per cent 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 U.S. Treasury yield curve, fanning fears of a recession.

While manufacturing and housing data suggest 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 was in a “favorable place,” but reiterated that the U.S. central bank would “act as appropriate” to keep the economic expansion on track.

The Fed lowered its short-term interest rate by 25 basis points last month for the first time since 2008, citing trade tensions and slowing global growth. Financial markets have fully priced in another quarter-percentage-point cut at the Fed’s Sept. 17-18 policy meeting.

The economy is also losing speed as the stimulus from the White House’s US$1.5 trillion tax-cut package and a government spending blitz fades. Economists are forecasting growth this year around 2.5per cent, below the Trump administration’s 3per cent target.

When measured from the income side, the economy grew at a 2.1per cent rate in the second quarter. Gross domestic income (GDI) increased at a 3.2per cent 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 2.1per cent rate last quarter, slowing from a 3.2per cent pace of growth in the first three months of the year.


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 4.8per cent rate after dropping 1.5per cent 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 2.5per cent to US$72.3 billion in July as exports rebounded. Exports of goods rose 0.7per cent, while imports fell 0.4per cent.

The department also reported retail inventories jumped 0.8per cent in July after falling 0.3per cent in the prior month. Retail inventories, excluding motor vehicles and parts, the component that goes into the calculation of GDP, rebounded 0.3per cent last month after dropping 0.2per cent in June.

U.S. stock index futures held gains after the release of the data while U.S. Treasury yields briefly extended their rise. The U.S. dollar was trading slightly higher against a basket of currencies.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged at a 4.7per cent rate in the second quarter. That was the fastest since the fourth quarter of 2014 and was a slight upward revision from the 4.3per cent pace estimated last month.

Spending is being driven by a strong labor market.

A report from the Labor 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 labor 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 US$982.5 billion in the second quarter, instead of US$978.7 billion as reported last month. Trade cut 0.72 percentage point from GDP growth last quarter instead of 0.65 percentage point as previously reported.

U.S.-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 US$69.0 billion rate in the second quarter from the previously estimated US$71.7 billion pace. Inventories chopped 0.91 percentage point from GDP growth last quarter, instead of 0.86 percentage point as reported in July.

The slowdown in inventory accumulation reflects robust consumer spending and an uncertain economic outlook.

Business investment declined at an unrevised 0.6per cent 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.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

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