Consumers seen powering US growth in Q2

WASHINGTON (Reuters)- The US economy likely regained speed in the second quarter as robust consumer spending offset a sharp moderation in inventory investment and weak exports, pointing to underlying growth momentum that could be maintained for the rest of the year.

Gross domestic product (GDP) probably increased at a 2.6- percent annual rate, which would be the fastest in a year, according to a Reuters survey of economists. The economy grew at a 1.1-percent pace in the first quarter.

“The economy clearly bounced back in the second quarter because consumers put the economy on their backs. Things are falling in place, the economy will continue to move forward,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

There are, however, downside risks to the forecast after data this week showed weak orders for manufactured capital goods in June, as well as a widening in the goods trade deficit and moderate inventory accumulation.

With the Federal Reserve watching the labor market and persistently low inflation, a pick-up in growth in the second quarter, which officials at the central bank are also anticipating, is not expected to have an impact on the outlook for interest rates in the short term.

The Fed, which on Wednesday left interest rates unchanged, said near-term risks to the economic outlook had “diminished.” The Fed raised its benchmark overnight interest rate in December for the first time in nearly a decade.

“The worry for the Fed is that you have a two- sided economy with strong consumer spending but weak investment. They will continue to put a rate hike on the table but they will end up procrastinating,” said Thomas Costerg, a senior US economist at Standard Chartered Bank in New York.

With the second- quarter GDP snapshot, the government will also publish revisions to data going back to 2013 through the first quarter of 2016. The revisions are expected to partially address measurement issues, which have tended to lower firstquarter GDP estimates.

Consumer spending was likely responsible for almost all of the rebound in GDP growth last quarter. Consumer spending, which accounts for more than two-thirds of US economic activity, is expected to have increased at its fastest pace since 2006.

That rate of growth is probably unsustainable, but economists say a tightening labor market, rising house prices and higher savings should underpin spending for the rest of 2016.

“There are good reasons to expect strong consumption,” said Anthony Karydakis, chief economic strategist at Miller Tabak in New York. “As long as you see the strength in consumption continuing, that gives a very reliable marker of the underlying momentum in the economy.”

Economists expect a marginal impact on growth from Britain’s departure from the European Union. They estimate that the so-called Brexit could subtract about twotenths of a percentage point from GDP growth over the next year.