US Economy Grew Only 1.2% In Second Quarter

The U.S. economy grew at an annual rate of 1.2 percent in the second quarter this year, which is below market expectation, the Commerce Department said Friday.

The department also revised first-quarter growth estimates for gross domestic product downward to 0.8 percent from 1.1 percent, reflecting poorer results in residential investment, private inventories and exports.

Ah yes … political narratives versus economic realities. This also marks the third straight quarterly drop.

“The U.S. economy just went through a meaningful inventory correction cycle”, said Harm Bandholz, chief U.S. economist at UniCredit Research in NY. Still, even tepid growth would be preferable to the possible recession that some had feared might be nearing after the economy’s woeful start to the year.

Disposable personal income rose 3.1 percent to $106.3 billion, faster than the first quarter’s revised estimate of 2.5 percent.

“We’re just muddling through”, said Joseph LaVorgna, chief USA economist at Deutsche Bank Securities in NY, who had forecast a 1 per cent gain in second-quarter GDP.

Economists believe other drags to growth during past quarters, including lower oil prices and a strong dollar, are fading. The 3% jump in services spending was the most in six quarters, likely aided by improved household finances, continued job growth and firmer wages.

“The staggering subtraction from inventory building was the biggest surprise to us and the market with the story likely being that businesses were caught off guard from the surge in consumer demand and were playing it safe in terms of restocking shelves”, BNP Paribas economists Paul Mortimer-Lee and Bricklin Dwyer said.

According to a new report from Zero Hedge, the U.S. Bureau of Economic Analysis (BEA) has taken a page out of the Bureau of Labor Statistics (BLS)’ book … which is to say it is messing with the numbers to make them look better.

Although that rate of growth is probably unsustainable, a tightening labor market, rising house prices and still higher savings should underpin spending for the rest of 2016. Ashworth predicts only one interest rate increase this year, in December. A key component was investment in housing, which declined at a 6.1% annual pace after increasing at a 7.8% annual rate in the first quarter. GDP growth hasn’t exceeded four percent in fifteen years – and hasn’t eclipsed the three percent threshold since 2005. Additionally, the BNP economists pointed out a period in 1986 was the only time in which the change in private inventories remained negative for two-consecutive quarters outside a recession.

Analysts predict that the economy will grow at an annual rate slightly above 2 per cent in the second half of the year – a modest pace in line with the pattern that’s existed since the recovery began in June 2009. The biggest drop-offs were in federal defense spending and investments by state and local governments. Prospects for business spending are not encouraging. That measure increased 2.1 per cent last quarter after a 1.2 per cent gain. Chevron, the second-largest U.S.-based oil producer, posted a second-quarter loss on Friday, its largest since 2001. McDonald’s (MCD) also reported weaker-than-expected USA sales in Q2.