US economic growth seen slowing in Q2

WASHINGTON (Reuters) - The US economy likely grew at its slowest pace in more than two years in the second quarter as an acceleration in consumer spending was probably offset by weak exports and business investment.

The anticipated moderation in growth will come against the backdrop of rising risks to the economy’s outlook, especially from a trade war between the US and China as well as slowing growth overseas, which are seen encouraging the Federal Reserve to cut interest rates next Wednesday for the first time in a decade.

With a strong labor market supporting consumer spending, a recession is, however, not on the horizon. The Commerce Department will publish the second quarter gross domestic product (GDP) report on Friday at 8:30 a.m. EDT (1230 GMT).

“The slowing in the economy spooked the Fed and markets, but the sky is not falling,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “If we do get a recession next year it would be because we shot ourselves in the foot with the trade tensions.”

Gross domestic product probably increased at a 1.8 percent annualized rate in the second quarter, also because of a smaller inventory build, according to a Reuters survey of economists, after surging at a 3.1 percent pace in the January to March period.

But with the volatile exports and inventory categories accounting for much of the expected step-down in GDP, the slowest growth pace since the first quarter of 2017 will likely mask some underlying strength in the 10-year economic expansion, the longest in history.

The survey was completed before the release of June wholesale and retail inventories as well as durable goods and goods trade deficit data, which led the Atlanta Fed to cut its forecast by three-tenths of a percentage point to a 1.3 percent rate.

The economy is slowing largely as the stimulus from the White House’s $1.5 trillion tax cut package fades. The tax cuts together with more government spending and deregulation were part of measures adopted by the Trump administration to boost annual economic growth to three percent on a sustained basis.

The economy grew 2.9 percent in 2018 and growth this year is expected to be around 2.5 percent. Economists estimate the speed at which the economy can grow over a long period without igniting inflation at between 1.7 percent and two percent.

“As the benefits of fiscal stimulus fade and trade policy uncertainty and slowing global demand remain headwinds to business investment, US GDP growth should moderate,” said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

The GDP report is also expected to show a pickup in inflation last quarter, but the overall trend likely remained benign. The government will also publish revisions to GDP data from 2014 through the first quarter of 2019.

Growth in consumer spending, which accounts for more than twothirds of US economic activity, is expected to have surged after slowing to a 0.9 precent rate in the first quarter, the weakest in a year. Some of the slowdown in consumer spending early in the year was blamed on a 35-day partial shutdown of the government. Spending is being supported by the lowest unemployment rate in nearly 50 years, which is lifting wages.

The jump in consumer spending was, however, likely blunted by a sharp drop in exports, in a reversal of the strong growth experienced in the first quarter. Weak exports are expected to have resulted in the deterioration of the trade deficit in the second quarter. Trade is believed to have subtracted from GDP growth last quarter after contributing 0.94 percentage point in the January-March period.