US econ­omy speeds up in Q2, wages con­tinue to lag

Kuwait Times - - BUSINESS -

The US econ­omy ac­cel­er­ated in the sec­ond quar­ter as con­sumers ramped up spend­ing and busi­nesses in­vested more on equip­ment, but per­sis­tent slug­gish wage gains cast a dark shadow over the growth out­look.

Gross do­mes­tic prod­uct in­creased at a 2.6 per­cent an­nual rate in the April-June pe­riod, which in­cluded a boost from trade, the Com­merce Depart­ment said in its ad­vance es­ti­mate on Fri­day. That was more than dou­ble the first quar­ter’s down­wardly re­vised 1.2 per­cent growth pace.

Wage growth, how­ever, de­cel­er­ated de­spite an un­em­ploy­ment rate that av­er­aged 4.4 per­cent in the sec­ond quar­ter. In­fla­tion also re­treated, ap­pear­ing to weaken the case for the Fed­eral Re­serve to raise in­ter­est rates again this year. “Although growth is solid, the lack of wage pres­sure buys the Fed plenty of time, and works with a very ‘grad­ual’ tight­en­ing cy­cle,” said Alan Ruskin, global head of G10 FX strat­egy at Deutsche Bank in New York. “There is more here for the Fed doves than the hawks.”

Prices of US Trea­suries rose af­ter the data but pared gains as oil prices hit twom­onth highs. The dol­lar fell against a bas­ket of cur­ren­cies and stocks on Wall Street were trad­ing mostly lower fol­low­ing re­cent hefty gains.

Econ­o­mists ex­pect the Fed to an­nounce a plan to start re­duc­ing its $4.2 tril­lion port­fo­lio of Trea­sury bonds and mort­gage-backed se­cu­ri­ties in Septem­ber. The US cen­tral bank left rates un­changed on Wed­nes­day and said it ex­pected to start wind­ing down its port­fo­lio “rel­a­tively soon.” The Fed has raised rates twice this year.

The rise in sec­ond-quar­ter GDP was in line with econ­o­mists’ ex­pec­ta­tions. Out­put was pre­vi­ously re­ported to have in­creased at a 1.4 per­cent pace in the first quar­ter.

The econ­omy grew 1.9 per­cent in the first half of 2017, mak­ing it un­likely that GDP would top 2.5 per­cent for the full year. Pres­i­dent Don­ald Trump has set an am­bi­tious 3.0 per­cent growth tar­get for 2017. Speak­ing to law en­force­ment of­fi­cers in Brent­wood, New York, Trump ap­plauded the GDP data and said it was the re­sult of his ad­min­is­tra­tion’s roll­back of some busi­ness and en­vi­ron­men­tal reg­u­la­tions. “We’re do­ing well, we’re do­ing re­ally well and we took off all those re­stric­tions,” Trump said. “Some we’re statu­to­rily stuck with for a lit­tle while, but even­tu­ally that statute comes up and we’re go­ing to be able to cut a lot more.”

But an­a­lysts are skep­ti­cal of the Repub­li­can pres­i­dent’s vow to push through ma­jor tax cuts in the wake of his party’s fail­ure early on Fri­day in the Se­nate to pass a bill that would have re­pealed parts of for­mer Pres­i­dent Barack Obama’s 2010 health­care law. So far, the po­lit­i­cal grid­lock in Washington has not hurt ei­ther busi­ness and con­sumer con­fi­dence.

Con­sumer boost growth

A resur­gence in con­sumer spend­ing ac­counted for the bulk of the pickup in eco­nomic growth in the sec­ond quar­ter. Con­sumer spend­ing, which makes up more than two-thirds of the US econ­omy, grew at a 2.8 per­cent rate. That was an ac­cel­er­a­tion from the 1.9 per­cent pace logged in the first quar­ter.

But with wage growth re­main­ing slug­gish de­spite the la­bor mar­ket be­ing near full em­ploy­ment, there are con­cerns that con­sumer spend­ing could slow in the third quar­ter. In a sep­a­rate re­port on Fri­day, the La­bor Depart­ment said wages and salaries in­creased 0.5. per­cent in the April-June pe­riod af­ter ac­cel­er­at­ing 0.8 per­cent in the first quar­ter.

They rose 2.3 per­cent on a year-on-year ba­sis. There were, how­ever, strong wage gains in the in­for­ma­tion, fi­nance and nat­u­ral re­sources sec­tors. “A tight­en­ing la­bor mar­ket ought to put up­ward pres­sure on wage rates, but em­ploy­ers are likely to re­sist in­creases as long as they can, given the state of pro­duc­tiv­ity,” said John Ry­d­ing, chief econ­o­mist at RDQ Eco­nom­ics in New York.

In­fla­tion was sub­dued in the sec­ond quar­ter. The Fed’s pre­ferred in­fla­tion gauge, the per­sonal con­sump­tion ex­pen­di­tures (PCE) price in­dex ex­clud­ing food and en­ergy, in­creased at a 0.9 per­cent rate. That was the slow­est rise in more than two years and fol­lowed a 1.8 per­cent rate of in­crease in the first quar­ter.

The gross do­mes­tic pur­chases price in­dex, another mea­sure of in­fla­tion pres­sures in the econ­omy, in­creased at a 0.8 per­cent rate af­ter ad­vanc­ing 2.6 per­cent in the prior quar­ter.

Busi­nesses helped to carry the econ­omy in the sec­ond quar­ter, with spend­ing on equip­ment jump­ing at a rate of 8.2 per­cent, the fastest in nearly two years. It was the third straight quar­terly in­crease. Spend­ing on min­ing ex­plo­ration, wells and shafts grew at a 116.7 per­cent rate, slow­ing from the first-quar­ter’s ro­bust 272.1 per­cent pace. As a re­sult, in­vest­ment on non­res­i­den­tial struc­tures in­creased at a 4.9 per­cent pace, mod­er­at­ing from the Jan­uary-March pe­riod’s brisk 14.8 per­cent rate.

Though busi­nesses con­tin­ued to care­fully man­age their in­ven­to­ries in the sec­ond quar­ter, they spent more in some places. In­ven­tory in­vest­ment was neu­tral to GDP growth af­ter slic­ing 1.46 per­cent­age points in the first quar­ter.

Trade added 0.18 per­cent­age point to growth, con­tribut­ing to out­put for a sec­ond straight quar­ter.

Hous­ing was a drag on growth in the last quar­ter, with in­vest­ment on home­build­ing con­tract­ing at a 6.8 per­cent rate, the worst per­for­mance in nearly seven years.

Auto pro­duc­tion slumped for a third straight quar­ter, while gov­ern­ment spend­ing re­bounded af­ter de­clin­ing in the prior pe­riod. Along­side the sec­ondquar­ter GDP re­port, the gov­ern­ment pub­lished re­vi­sions to data go­ing back to 2014, which showed lit­tle change in the growth pic­ture. — Reuters

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