Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

U.S. economy slows in second quarter ; weak business investment a red flag

Economic IndicatorsJul 26, 2019 01:40PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. economic growth slowed less than expected in the second quarter as a surge in consumer spending blunted some of the drag from declining exports and a smaller inventory build, which could further allay concerns about the economy's health.

But the fairly upbeat report from the Commerce Department on Friday had some red flags for the 10-year-old economic expansion, the longest on record. Business investment contracted for the first time in more than three years and housing declined for a sixth straight quarter.

Federal Reserve Chairman Jerome Powell early this month flagged the two sectors as areas of weakness in the economy. They are likely to provide additional cover for the Fed to cut interest rates next Wednesday for the first time in a decade because of rising risks to the economy's outlook from a bitter trade war between the United States and China, and slowing global growth.

"The key to future economic growth is business spending. Evidently, businesses do not share the ebullience consumers have," said Sung Won Sohn, an economics professor at Loyola Marymount University in Los Angeles. "This is not a good sign for the economy because there would be fewer jobs for consumers. For this reason, the Fed will cut rates next week."

The Fed is widely expected to cut its benchmark rate by a quarter point at its July 30-31 meeting.

Gross domestic product increased at a 2.1% annualized rate in the second quarter, stepping down from an unrevised 3.1% pace in the January-March period. Economists polled by Reuters had forecast GDP increasing at a 1.8% rate in the second quarter. They estimate the speed at which the economy can grow over a long period without igniting inflation at between 1.7% and 2.0%.

President Donald Trump, whose administration has sought to boost the economy through a cocktail of massive tax cuts, government spending and deregulation, downplayed the slowdown in growth and blamed the Fed for the loss of momentum.

"Not bad considering we have the very heavy weight of the Federal Reserve anchor wrapped around our neck," Trump wrote on Twitter. "Almost no inflation. USA is set to Zoom!"

Revisions to growth data published by the government on Friday also confirmed the economy missed the White House's 3.0% target in 2008, growing at a rate of 2.9%. When measured on a year-on-year basis the economy only expanded 2.5%, instead of 3.0% as previously estimated.

Trump, who likes to brag about the economy being one of the biggest successes of his first term, had highlighted the year-on-year growth figure as evidence of the effectiveness of his policies.

Economists, who are forecasting growth this year around 2.5%, say the massive fiscal stimulus, which included a $1.5 trillion tax cut package, had no lasting impact on growth, while driving up the country's debt.

"The data makes one thing clear, the tax cuts did not result in a permanent shift upward in the growth path of the U.S. economy," said Joe Brusuelas, chief economist at RSM in New York.

The GDP report showed a pickup in inflation last quarter, though the trend remained well below the Fed's 2% target.

The dollar rose to a two-month high versus a basket of currencies as robust consumer spending further diminished expectations of a more aggressive 50 basis point rate cut on Wednesday. U.S. Treasury yields slipped. Stocks hit record highs, also boosted by robust earnings from Google-owner Alphabet (O:GOOGL) and Twitter (N:TWTR).


Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged at a 4.3% rate in the second quarter, the fastest since the fourth quarter of 2017. That followed a more lackluster 1.1% growth rate in the first quarter, blamed on a 35-day partial shutdown of the government.

Spending is being supported by the lowest unemployment rate in nearly 50 years and helped offset some of the weakness from exports, which fell at a 5.2% rate last quarter after growing in the first quarter.

The plunge in exports led to a wider trade deficit, which subtracted 0.65 percentage point from GDP growth last quarter. Trade contributed 0.73 percentage point in the January-March period.

Robust consumer spending helped businesses to whittle down an inventory overhang. Inventory investment increased at a $71.7 billion rate, slowing from the first quarter's $116.0 billion pace of increase. Inventories cut 0.86 percentage point from GDP growth in the second quarter after adding 0.53 percentage point in the first quarter.

Economists said inventories still remained high and will continue to hurt manufacturing.

Business investment fell at a 0.6% rate in the second quarter, the first contraction since the first quarter of 2016. It was pulled down by a 10.6% pace of decline in spending on structures, depressed by decreases in commercial and healthcare, and mining exploration, shafts and wells.

Spending on intellectual products, including research and development, increased. Business spending on equipment rebounded at a 0.7% rate in the second quarter, but is seen constrained by design problems at aerospace giant Boeing (N:BA).

Boeing reported its biggest-ever quarterly loss on Wednesday due to the spiraling cost of resolving issues with its 737 MAX airplane, grounded worldwide in March after two fatal crashes in Ethiopia and Indonesia. It warned it might have to shut 737 MAX production completely if it runs into new hurdles with global regulators to getting its best-selling aircraft back in the air.

Growth in government investment accelerated, notching its best performance in 10 years, but spending on homebuilding contracted for a sixth straight quarter, the longest such stretch since the Great Recession.

U.S. economy slows in second quarter ; weak business investment a red flag

Related Articles

U.S. new home sales drop to 14-month low in June
U.S. new home sales drop to 14-month low in June By Reuters - Jul 26, 2021 2

By Lucia Mutikani WASHINGTON (Reuters) - Sales of new U.S. single-family homes tumbled to a 14-month low in June and sales in the prior month were weaker than initially estimated,...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (3)
Thomas DeVito
Thomas DeVito Jul 30, 2019 5:50AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
all my friends with businesses say they can't find workers. how to grow without workers. Trump's immigration policy is worse than the trade policy
Steven Chen
Gamer_LG Jul 26, 2019 8:08AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
tax cut was suppose to get more investment but got stock buyback instead. and we think lower rate is going to do the trick here? nope, it'll be cheap money cycling at same place as ever.
Lloyd McCord
Lloyd McCord Jul 26, 2019 7:19AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
More doom and gloom fake news from our socialist Canadian friends at Reuters who just can't stop shilling for China. So embarrassing.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email