U.S. Economy Grew a Less-Than-Forecast in Q2

The U.S. economy expanded less than forecast in the second quarter after a weaker start to the year than previously estimated as companies slimmed down inventories and remained wary of investing amid shaky global demand.

Gross domestic product rose at a 1.2 percent annualized rate after a 0.8 percent advance the prior quarter, Commerce Department figures showed Friday in Washington. The median forecast of economists surveyed by Bloomberg called for a 2.5 percent second-quarter increase.

The report raises the risk to the outlook at a time Federal Reserve policy makers are looking for sustained improvement, Where consumers were resilient last quarter, businesses were cautious — cutting back on investment and aggressively reducing stockpiles amid weak global markets, heightened uncertainty, and the lingering drag from a stronger dollar.

“It’s still very much a stop-and-go economy, and we could see more of the same in the second half,” Thomas Costerg, a senior economist at Standard Chartered Bank in New York, said before the report. “There are a few dark clouds. That could prevent economic growth from breaking out.”

Private fixed investment, which includes residential and business spending, dropped at a 3.2 percent pace in the second quarter, the most in seven years.

With Friday’s report, the Commerce Department also issued its annual revisions, updating the data back through 2013. The first-quarter’s reading was revised from a previously reported 1.1 percent gain.

Economists’ second-quarter estimates for GDP, or the value of all goods and services produced, ranged from 1 percent to 3.2 percent. The growth estimate is the first of three for the quarter, with the other releases scheduled for August and September when more information becomes available.

Cutting Stockpiles

Inventories were reduced by $8.1 billion in the second quarter, the most since third quarter of 2011 and subtracting 1.16 percentage points from the economy. At the same time, leaner inventories could set the stage for a pickup in production later this year should demand hold up.

Household consumption, which accounts for about 70 percent of the economy, grew at a 4.2 percent annualized rate, the biggest jump since the end of 2014 and adding 2.83 percentage points to growth. That followed a revised 1.6 percent increase from January through March. The Bloomberg survey median forecast for the second quarter was 4.4 percent.

Corporate spending on equipment, structures and intellectual property, decreased an annualized 2.2 percent after a 3.4 percent fall in the first quarter. Outlays for equipment dropped for the fourth quarter in the last five. Spending on structures — everything from factories to shops to oil rigs — have increased in just one quarter since the end of 2014.

Inventories and the trade gap are two of the most volatile components in GDP calculations. To get a better sense of demand in the U.S., economists look at final sales to domestic purchasers, or GDP excluding inventories and net exports. That measure increased 2.1 percent last quarter after a 1.2 percent gain.

Residential Investment

Also holding back economic growth in the second quarter was a decrease in residential investment, which fell at a 6.1 percent pace. That was the most since the third quarter of 2010 and marked the first decrease in two years.
Government spending also shrank last quarter, declining 0.9 percent, the most in more than two years as outlays for the military fell. States and municipalities also cut back.

The GDP report also showed price pressures remain limited. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 1.7 percent annualized pace compared with 2.1 percent in the prior quarter.

Fed policy makers, who left interest rates unchanged this week, said risks to the U.S. outlook have “diminished” and the labor market is getting tighter, suggesting conditions are turning more favorable for an increase in borrowing costs.

Bloomberg

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell