U.S. economy slows, denying Trump 3% talking point

The U.S. economy is slowing, dragged down by trade tensions and weak growth overseas. But there are few signs that the decadelong expansion is on the verge of stalling out.

Gross domestic product, the broadest measure of goods and services produced in the economy, rose at a 2.1 percent annual rate in the second quarter, according to preliminary data released by the Commerce Department on Friday.

That is significantly lower than the 3.1 percent growth rate in the first quarter. And it falls far short of the 3 percent target that President Donald Trump has repeatedly promised. Data revisions released Friday wiped away what had been a prized talking point for the White House: GDP grew 2.5 percent for all of 2018, down from the 3 percent previously reported.

During the 2016 campaign, Trump slammed President Barack Obama for being “the first president in modern history not to have a single year of 3 percent growth.” Nonetheless, Trump hailed the report Friday, even as he renewed his criticism of the Federal Reserve, calling its policies an “anchor wrapped around our neck” in a post on Twitter.

Fed officials have said repeatedly that Trump’s comments will not affect their decisions. Still, they are expected to cut interest rates at their meeting next week to try to prevent a more significant slowdown.

But while a cut is all but certain, Friday’s report might actually weaken the case for further stimulus later this year — something that investors have been anticipating but that Fed officials have not promised. Inflation, which had been running below the bank’s 2 percent target, picked up in the second quarter: Consumer prices rose at a 2.3 percent rate, or 1.8 percent excluding the volatile food and energy components. The report also showed that final demand — a measure of underlying growth that strips out some of the most volatile components — accelerated this spring.

The big quarter-to-quarter swings in the growth data are almost certainly exaggerated. The larger trend shows that the economy has cooled since last year, when tax cuts and government spending gave growth a temporary jolt. But the strong job market and robust consumer spending are keeping the recovery on track, even as various forces — foreign and domestic — threaten to knock it off course.

Still, on Friday, the S&P 500 and the Nasdaq closed at new highs after the GDP report was released.

“It’s a good economy, but it’s got fragilities in it,” said Diane Swonk, chief economist for the accounting firm Grant Thornton. “You’d expect to feel more euphoria and more underlying strength, and instead what we’re seeing is fault lines.”

Consumer spending is the bedrock of the economy and has been resilient throughout the recovery. So it was a worrying sign when spending slumped in late 2018 and early 2019, dragged down by stock market volatility, a prolonged government shutdown and harsh winter weather.

But consumer spending roared back in the spring, rising at a 4.3 percent rate. Government spending, which picked up in the second quarter after being depressed by the shutdown, also helped lift growth.

Unfortunately, other parts of the economy look much weaker. Residential investment, which includes housing construction, declined for the sixth consecutive quarter. Business investment also declined and exports slumped as manufacturers, in particular, were battered by tariffs and slowing demand from overseas.