MercoPress. South Atlantic News Agency

Consumers help US economy to remain strong but business investment contracts

Gross domestic product increased at a 2.1% annualized rate in the second quarter, stepping down from an unrevised 3.1% pace in the January-March period.

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.

But the fairly upbeat report from the Commerce Department on Friday had some red flags for the 10-year-old economic expansion, the longest on record. Business investment contracted for the first time in more than three years and housing declined for a sixth straight quarter.

Federal Reserve Chairman Jerome Powell early this month flagged the two sectors as areas of weakness in the economy. They are likely to provide additional cover for the Fed to cut interest rates next Wednesday for the first time in a decade because of rising risks to the economy's outlook from a bitter trade war between the United States and China, and slowing global growth.

“The key to future economic growth is business spending. Evidently, businesses do not share the ebullience consumers have,” said Sung Won Sohn, an economics professor at Loyola Marymount University in Los Angeles. “This is not a good sign for the economy because there would be fewer jobs for consumers. For this reason, the Fed will cut rates next week.”

The Fed is widely expected to cut its benchmark rate by a quarter point at its Jul 30-31 meeting.

Gross domestic product increased at a 2.1% annualized rate in the second quarter, stepping down from an unrevised 3.1% pace in the January-March period.

President Donald Trump, whose administration has sought to boost the economy through a cocktail of massive tax cuts, government spending and deregulation, downplayed the slowdown in growth and blamed the Fed for the loss of momentum.

“Not bad considering we have the very heavy weight of the Federal Reserve anchor wrapped around our neck,” Trump wrote on Twitter. “Almost no inflation. USA is set to Zoom!”

Revisions to growth data published by the government on Friday also confirmed the economy missed the White House's 3.0 per cent target in 2008, growing at a rate of 2.9%. When measured on a year-on-year basis the economy only expanded 2.5%, instead of 3% as previously estimated.

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, surged at a 4.3% rate in the second quarter, the fastest since the fourth quarter of 2017. That followed a more lackluster 1.1% growth rate in the first quarter, blamed on a 35-day partial shutdown of the government.

Spending is being supported by the lowest unemployment rate in nearly 50 years and helped offset some of the weakness from exports, which fell at a 5.2% rate last quarter after growing in the first quarter.

The plunge in exports led to a wider trade deficit, which subtracted 0.65 percentage point from GDP growth last quarter. Trade contributed 0.73 percentage point in the January-March period.