US economic growth prints well below expectations

Cautious businesses largely offset more robust consumer spending, which could be a concern to Fed officials.

Rebounding consumer spending was not enough to offset business caution and boost US GDP as much as economists had expected. Picture: AP Photo/Tony Dejak.

US economic growth sputtered this spring with cautious businesses largely offsetting more robust consumer spending.

Gross domestic product, the broadest measure of goods and services produced across the US, grew at a seasonally adjusted annual rate of 1.2 per cent in the second quarter, the Commerce Department said Friday. The figure was well below the 2.6 per cent growth economists surveyed by The Wall Street Journal had forecast.

The gain marks only a slight acceleration from the first quarter, when GDP advanced at a downwardly revised 0.8 per cent pace. The first quarter was previously seen as increasing 1.1 per cent from the prior period.

The economy has grown at less than a 2 per cent pace for three straight quarters. Since the recession ended seven years ago, the expansion has failed to achieve the breakout seen in past recoveries. The average annual growth rate during the current business cycle remains the weakest of any expansion since at least 1949.

Lacklustre growth could be a concern to Federal Reserve officials considering whether the economy is strong enough to absorb higher interest rates later this year. It could also influence voters weighing the economic track record during Barack Obama’s administration before electing a new president in November.

Annual revisions, also released Friday, did show the economy expanded 2.6 per cent in 2015 from 2014, marking the best yearly gain since 2006.

In the second quarter, consumer spending rose strongly. Personal consumption, which accounts for more than two-thirds of economic output, expanded at a 4.2 per cent rate, the best gain since late 2014. Outlays on goods advanced 6.8 per cent. Spending on services climbed 3 per cent.

But non-residential fixed investment, a measure of business spending, declined at a 2.2 per cent pace, the third straight quarterly drop. Companies spent less on buildings and equipment.

Firms also paired back inventories sharply. The change in private inventories subtracted 1.16 percentage points from overall growth. That was the category’s fifth-straight decline and the largest drag from inventories in two years.

Weak business investment could suggest firms don’t have confidence in the global economy. Manufacturers especially have been challenged by a strong dollar, which makes US-made goods more expensive overseas. The energy industry has also been constrained with relatively low oil and natural gas prices curtailing investments in mining and wells.

Residential fixed investment, including on home building and major improvements, fell at a 6.1 per cent pace during the second quarter. The category had been a consistent contributor to economic gains since the early 2014.

International trade, however, was a positive, adding 0.23 percentage point to overall growth. Exports in the quarter rose at a 1.4 per cent pace. Imports, which subtract from GDP, fell slightly. The latest figures don’t capture any effect from the UK’s Brexit decision because the vote took place during the final days of the quarter, which ended June 30.

Spending at all levels of government declined at a 0.9 per cent during the quarter, led by a decrease in federal defence spending.

The latest economic figures come against a backdrop of modestly firmer inflation.

The price index for personal consumption expenditures rose at a 1.9 per cent from the prior quarter. Core prices, which exclude volatile food and energy costs, rose 1.7 per cent. Those readings are only slightly below the Fed’s target of a 2 per cent annual inflation rate.

The advance GDP figures are based on incomplete information and often get revised as more data becomes available.

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