US economy loses steam with growth at 2.1 per cent in Q2

US economic growth slowed in the second quarter by less than forecast as consumer spending topped estimates, though weaker business investment and exports underscored the risks spurring the Federal Reserve toward an interest-rate cut next week. Gross domestic product expanded at a 2.1 per cent annualised rate, according to Commerce Department data Friday that topped forecasts for 1.8 per cent. That follows an unrevised 3.1 per cent advance in the first quarter and updated data showing growth last year was slower than previously reported. Consumer spending, the biggest part of the economy, increased 4.3 per cent, while government spending climbed 5 per cent and offered the biggest boost in a decade. Nonresidential investment fell 0.6 per cent for the first drop since 2015 and residential decreased for a sixth straight period. “We have pockets of weakness in manufacturing, business investment, but as the consumer goes, so does the US economy -- the fundamentals for the consumer are very, very good,” said Ryan Sweet, an economist at Moody’s Analytics. “Unless the consumer starts to hunker it in, I think the US economy is going to get through this little soft patch without it turning into something worse.” Treasury yields and the dollar initially rose as the data probably reduced chances of more aggressive Fed easing this year. The mixed report highlights how President Donald Trump -- who’s repeatedly called for lower interest rates -- is enjoying signs of a solid economy while his trade war with China weighs on the expansion and fuels uncertainty for global businesses. Revised data released Friday showed the economy missed Trump’s 3 per cent growth goal in 2018 after previous data had showed it matching. The report on the broadest measure of all goods and services comes as Fed is expected to cut interest rates next week by a quarter-point. The GDP report isn’t likely to sway that outcome, though officials are likely to consider the weakness in trade and corporate investment as risks to the economic outlook. Friday’s report showed fresh evidence that trade is weighing on the expansion as exports dropped 5.2 per cent while imports rose just 0.1 per cent. Overall growth on a year-over-year basis slowed to 2.3 per cent, the weakest pace in two years. Excluding the volatile trade and inventories components of GDP, final sales to domestic purchasers increased at a 3.5 per cent pace, the best in a year. Economists monitor this measure for a better sense of underlying demand. Inventories were a drag on growth, subtracting 0.86 point from growth after a 0.53 point contribution in the prior period. The Fed’s preferred underlying inflation measure, the personal consumption expenditures price index excluding food and energy, firmed to a 1.8 per cent annual pace in the quarter, closer to policy makers’ 2 per cent objective. The expansion, which this month became the longest on record, is cooling as the effects of the 2018 fiscal stimulus fade and global growth slows, with the International Monetary Fund again cutting its estimate earlier this week. A stronger dollar and new tariffs are also making it less desirable to do business with the US. Other data have highlighted the cooler pace of growth, with manufacturing figures showing tepid conditions and bellwether Caterpillar reporting a lackluster second quarter. A US measure of production has declined in consecutive quarters, the common definition of recession, while a gauge of global factory activity contracted in May and June. A more upbeat report Thursday showed business-equipment orders jumped in June by the most since early 2018, signaling company investment may be regaining the momentum that would help support the economy in coming months. Consumer sentiment is near historical highs and robust spending is backstopping growth. Retail sales have advanced for four straight months, the longest streak since early 2018, indicating Americans are benefiting from a tight labour market and elevated wages. Coffee chain Starbucks on Thursday said US comparable-store sales soared 7 per cent from a year earlier. “This report shows we are not seeing shocks to the US consumer,” Denise Chisholm, a strategist at Fidelity Management, said in a Bloomberg Television interview. “It’s positive from the framework of, we may see a prolonged expansion cycle continue.” Mr Trump targets growth of about 3 per cent, though economists see the pace of growth remaining under 2 per cent through at least the end of next year. Revised GDP figures released Friday show 2.5 per cent growth on a fourth-quarter-to-fourth-quarter basis last year. That compares with a previous estimate of 3 per cent and an upwardly revised 2.8 per cent in 2017, the first year of Mr Trump’s presidency. Government spending got a boost from a 15.9 per cent surge in federal nondefence expenditures, which contributed the most in two decades to growth. That was boosted by delayed compensation for some federal employees after the government shutdown that ended in January.