The Economy

GDP Growth Revised Down to 1.1% for Q2

Economists expect growth to rebound to more than 3% in the third quarter, with a healthy labor market supporting consumer spending.
Matthew HellerAugust 29, 2016

U.S. economic growth in the second quarter was slightly lower than originally estimated, but one measure of corporate profits rose for a second straight quarter.

The Commerce Department said gross domestic product increased at a 1.1% annual rate in the spring, compared to its earlier estimate of 1.2%. The economy got a boost from consumers whose spending rose a revised 4.4% but that was offset by weak business investment and a rise in imports.

Businesses cut fixed investment by 2.5% in the second quarter, while inventories fell by a revised $12.4 billion, the first decline since 2011. Imports were revised to show a 0.3% increase after an earlier estimate of a 0.4% decline.

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“U.S. businesses remain under pressure from global weakness and other forces,” The Wall Street Journal said, noting that corporate profits have been stressed in recent years by the strong dollar.

In the second quarter, pre-tax corporate profits, with inventory valuation and capital consumption adjustments, fell 1.2%, marking the fifth decline in the past six quarters. After-tax adjusted profits were down 2.4%.

But after-tax, unadjusted profits rose 4.9% to $1.627 trillion after an 8.9% gain in the first quarter. “The weakness in earnings has largely been confined to energy and manufacturing, especially export-intensive businesses,” MarketWatch said. “Financial and service-oriented companies that employ the vast majority of Americans are doing better.”

The downward revision to GDP in the second quarter reflected larger declines than had been previously estimated for residential construction and spending by state and local governments. But economists are expecting stronger growth in the third quarter, with the goods trade deficit narrowing sharply and residential construction rising in July.

The Atlanta Federal Reserve is currently forecasting third-quarter GDP rising at a 3.4% rate while forecasting firm Macroeconomic Advisers is predicting a 3.1% gain.

“The second quarter GDP report was disappointing, but growth should bounce back in the third quarter,” Stuart Hoffman, chief economist at PNC Financial Services, told MarketWatch.

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