US economy slows in Q2

Consumer spending robust

WASHINGTON, Aug 29, (RTRS): US economic growth slowed in the second quarter, the government confirmed on Thursday (Aug 29), but the strongest consumer spending in 4-1/2 years amid a solid labour market threw cold water on financial market expectations of a recession.

Signs that the economy was growing at a moderate pace and not slowing rapidly were underscored by other data showing a narrowing in the goods trade deficit in July as exports rebounded. Businesses stepped up inventory accumulation last month, likely in anticipation that demand would remain strong.

Consumers have so far shown no signs of pulling back, with retail sales powering ahead in July. But there are fears the Trump administration’s yearlong trade war with China, which will see additional tariffs on Chinese goods coming into effect in September and December, could take the sails out of consumer spending.

The deterioration in trade relations between the two economic giants has roiled global stock markets and triggered an inversion of the US Treasury yield curve, fanning fears that the longest economic expansion in history was in danger of being interrupted by a recession.

Federal Reserve Chair Jerome Powell said last week that the economy was in a “favorable place,” but reiterated that the US central bank would “act as appropriate” to keep the economic expansion on track.

“The economy is still on cruise control and growing at a slow but steady pace that looks sustainable as the trade wind skies continue to darken,” said Chris Rupkey, chief economist at MUFG in New York.

Downward

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

The small downgrade was in line with economists’ expectations. The economy grew at a 3.1 per cent rate in the JanuaryMarch quarter. It expanded 2.6 per cent in the first half of the year.

The dollar rose against a basket of currencies, while US Treasury prices fell. Stocks on Wall Street rose, boosted in part by a hopeful tone from China on a resolution of the trade dispute with Washington.

When measured from the income side, the US economy grew at a 2.1 per cent rate in the second quarter. Gross domestic income (GDI) increased at a 3.2 per 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 2.1 per cent rate last quarter, slowing from a 3.2 per 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. Aftertax profits without inventory valuation and capital consumption adjustment, which correspond to S&P 500 profits, increased at a 4.8 per cent rate after dropping 1.5 per cent in the first quarter.

The economy is largely 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 2.5 per cent, below the Trump administration’s three per cent target.

The US-China trade war has weighed heavily on manufacturing and business investment, which contracted in the second quarter.

That is expected to keep the Fed on track to cut interest rates by another quarter-percentage-point cut next month. 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.

But the economy appears to have maintained its moderate pace of growth early in the third quarter. In another report on Thursday, the Commerce Department said the goods trade deficit narrowed 2.5 per cent to US$72.3 billion in July as exports rebounded. In this file photo, cargo ships are docked at the Port of Los Angeles in Los Angeles. On Thursday, Aug 29, the Commerce Department issues the second

estimate of how the US economy performed in the April -June quarter. (AP)