The economy grew at a 1.2 percent pace in the second quarter, the Department of Commerce reported Friday, barely an improvement over the first quarter’s growth and short of investors’ expectations.
Private-sector economists were expecting a 2.6 percent annual growth rate for Gross Domestic Product, which is adjusted for inflation and for seasonal variations.
In addition to the disappointment for the second quarter, growth in the first quarter was revised down, from 1.1 percent to 0.8 percent. Other measures of economic output for the first three months were marked down even further.
Friday’s report marks the third straight quarter for the U.S. with economic growth running under 2 percent, a development that could weigh against further monetary tightening by the Federal Reserve. It would take growth of nearly 3 percent on average the rest of the year to meet the Fed’s modest projections for 2 percent growth overall on the year. The continued weak growth could also hurt the odds of Democrats in the upcoming elections, as disappointing growth tends to work against the party holding the presidency.
Even so, there were some signs that the quarter was not as bad as the headline number made it look. Consumer spending grew at a 4.2 percent rate, the strongest such showing in over a year.
Meanwhile, a slowdown in business spending on inventories cut over a percentage point off of the overall growth rate. As a result, growth in the quarter was likely understated, because inventory spending is generally not predictive of future growth.
On the other hand, business investment, which does predict future growth, was down for the third straight quarter.
The quarter’s growth failed to take off even amid signs that the headwinds created by slow growth overseas have abated. Over the past two years, weak global growth has driven down the price of oil, decimating the U.S. energy sector, and propped up the dollar, hurting manufacturers. But in both quarters of 2016, trade has stopped subtracting from Gross Domestic Product and even boosted it, very mildly.
“In short, growth was weaker than expected, although mainly because of a larger-than-expected drag from inventories, which is positive for future growth,” wrote Jim O’Sullivan, economist for the forecasting firm High Frequency Economics.
One major question for the rest of the year is whether the weak output numbers or the relatively strong job growth of recent months proves to be reliable. While the GDP reports suggest that the economy is sputtering, payroll job growth has averaged 147,000 over the past three months, more than enough to keep unemployment falling rather than rising.
If it turns out that the output numbers are the better indicator, Republicans will not hesitate to run even harder against the economic record of President Obama. “Americans deserve better than the anemic growth they’re getting today,” GOP Ways and Means Committee chairman Kevin Brady of Texas said in response to Friday’s report.
