The Economy

GDP Misses Forecasts With 1.2% Growth in Q2

The pace of economic expansion has now been around 1% for three straight quarters but economists see some drags on growth fading.
Matthew HellerAugust 1, 2016

U.S. economic growth in the second quarter was well below what economists expected, but concerns about the recovery stalling were tempered by robust consumer spending.

The Commerce Department said gross domestic product increased at a 1.2% annual rate after rising by a downwardly revised 0.8% pace in the first quarter. Economists polled by Reuters had forecast GDP growth of 2.6% rate in the last quarter.

It was the third straight quarter of growth around 1% and the Commerce Department also cut its growth estimate for the fourth quarter by five-tenths of a percentage point to 0.9%.

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The second-quarter doldrums reflected in part a decline of $8.1 billion in business inventories that was the first such drop since the third quarter of 2011. Business spending on equipment, which has been hurt by cheap oil, contracted for a third consecutive quarter, the longest stretch since the recession.

Excluding inventories, GDP growth rose at a 2.4% rate in the second quarter and domestic demand increased 2.7%. “The U.S. economy just went through a meaningful inventory correction cycle,” Harm Bandholz, chief U.S. economist at UniCredit Research in New York, told Reuters.

“In the past, those developments have even led to recessions, but given that potential growth is slower these days and that other headwinds occurred at the same time, one may actually be tempted to highlight the economy’s resilience,” he added.

Indeed, as The Wall Street Journal pointed out, the GDP figures are “in some ways discordant with other gauges of the economy,” including consumer spending. Personal consumption, which accounts for more than two-thirds of economic output, expanded at a 4.2% rate in the second quarter, the best gain since late 2014.

“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,” Reuters said.

Economists believe other drags to growth during past quarters, including lower oil prices and a strong dollar, are fading. While growth is expected to rebound in the second half, Reuters said, expansion for 2016 will probably fall short of 2%.