Economic Growth Slowed In Second Quarter

U.S. economy slowed but still grew at a solid clip in the second quarter, gross domestic product, a broad measure of goods and services produced across the economy, rose at a 2.1% annual rate in the second quarter, adjusted for seasonality and inflation, down sharply from a 3.1% pace in the first quarter, the Commerce Department said Friday.

Businesses took a more cautious approach in the second quarter, causing a key gauge of their investment to decline for the first time since early 2016. Nonresidential fixed investment—which reflects spending on software, research and development, equipment and structures—fell at a 0.6% rate, compared with a 4.4% rise in the first quarter.


One factor that generated uncertainty for businesses in the second quarter was the international trade situation, as the U.S. increased levies on Chinese goods and threatened, but didn’t implement, tariffs on Mexican imports.

Joe Baiz, president of Phoenix-based plastic-injection-mold manufacturer 4front Manufacturing, said business “slowed a little bit in the second quarter” as worries over trade policy generated “a lot of fear of the unknown.” Trade itself was a drag on growth, as exports fell at a 5.2% rate while imports rose slightly, expanding the deficit.

Shoppers picked up the slack however. Consumer spending, which accounts for more than two-thirds of the economy, rose at an inflation-adjusted annualized rate of 4.3% in the second quarter, up from its first-quarter pace of 1.1% and marking the strongest reading since late 2017.

“The simple proposition is that the trade war made manufacturing weaker and the tax cut made consumer spending stronger,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

The White House blamed the Federal Reserve for the growth slowdown. President Trump said on Twitter Friday morning that the 2.1% figure was “not bad considering we have the very heavy weight of the Federal Reserve anchor wrapped around our neck.”

Mr. Trump has criticized the central bank for holding interest rates steady so far this year and he has repeatedly called for rate cuts to boost growth.

Friday’s report is one of the last major readings of the economy’s temperature Fed officials will see before their policy meeting July 30-31. They are prepared to cut their benchmark interest rate by a quarter percentage point from its current range between 2.25% and 2.5% and signal more reductions to come to bolster the U.S. economy at a time of cooling global momentum.

The divergent signals from strong consumer spending and weakening business investment in the second quarter leave a mixed picture. The economy remains supported by low unemployment and rising incomes, but slowing global growth, a strong dollar and trade uncertainties are weighing on the outlook.

“Combine all those together and you have the kind of [GDP] report that justifies a rate cut,” said Gregory Daco, an economist at Oxford Economics. Mr. Daco likened a rate reduction now to a vaccination shot for the economy and said that “you want to keep looking at the patient as you get into the fall.”

Some companies have tempered their outlook for this year due to worries about U.S. trade policy. Materials-science company Dow Inc. this week reported a decline in profit and lowered its guidance for capital expenditures.

“The macro environment is cautious, largely driven by geopolitical volatility and prolonged trade negotiations which continue today,” Chief Executive Jim Fitterling said Thursday. Earnings for the S&P 500 appear to have grown in the second quarter at their most anemic pace since mid-2016.

Earnings per share are expected to rise just 0.5% over second-quarter 2018, according to an estimate from financial-data firm Refinitiv, which combines analyst estimates with actual results from the 44% of companies that have already reported.

Housing was a headwind for growth for the sixth quarter in a row as residential investment fell at a 1.5% annual pace, despite falling mortgage rates in the April to June period.

Businesses also drew down inventories in the second quarter rather than replenished stock shelves, which subtracted 0.85 percentage point from the quarter’s overall GDP growth rate.


Government spending boosted overall growth, rising at a 5.0% annual rate in the second quarter, though that was partly a rebound from the effects of the federal government shutdown that started in the fourth quarter and stretched into late January.

Many economists expect growth this year of around the 2.3% averaged during the current expansion, which started in mid-2009 and this month became the longest on record. Fed officials’ median projection in June was for 2.1% growth from the fourth quarter of 2018 to the fourth quarter of 2019.

6 thoughts on “Economic Growth Slowed In Second Quarter

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