US GDP growth of 1.2% misses estimates

Posted on July 29, 2016

Immigration activists holding an American flag rally outside the U.S. Supreme Court as justices hear arguments in a challenge by 26 states over the constitutionality of President Barack Obama's executive action to defer deportation of certain immigrant children and parents who are in the country illegally in Washington April 18, 2016. REUTERS/Joshua Roberts©Reuters

The US economy expanded at a significantly slower pace than expected in the first half of 2016, data released on Friday showed, adding to concerns that weakness in the global economy and trouble in the oil industry may have had a greater impact than previously forecast.

The world’s biggest developed economy expanded at an annualised pace of 1.2 per cent in the three months ended June, from 0.8 per cent in the first quarter, the Bureau of Economic Analysis said. Wall Street economists had forecast the pace would tick up to 2.5 per cent in the second quarter.

    The average growth pace in the first half of 2016 was only 1 per cent, weaker than the roughly 2 per cent average since the economic expansion began in 2009.

    The figures were a “disappointment”, said Brian Coulton, chief economist at Fitch Ratings, adding that “consumer spending rebounded as expected and external demand picked up [but] investment weakened further and inventories were a big drag”.

    The tepid data may dim speculation that the Federal Reserve will increase its benchmark interest rate later this year.

    The market-implied odds of a 2016 rate rise fell in the wake of the report to 37.3 per cent, from 44.9 per cent on Thursday, and almost 50 per cent on Tuesday, according to Bloomberg calculations based on federal funds futures. The policy-sensitive two-year Treasury note yield, which moves in the opposite direction of the bond’s price, declined 2.8 basis points to 0.679 per cent.

    The weakness in the second quarter was led by investment, which tumbled at a rate of 9.7 per cent, the third straight decline, as companies cut back on spending on structures, such as oil wells, equipment and inventories. Residential investment also fell at a quicker rate than many economists forecast.

    “The picture from the corporate sector remains the same; weakness in manufacturing and energy, plus lacklustre growth outside the US, has dampened the overall investment environment,” said Michael Gapen, chief US economist at Barclays.

    Companies’ “caution about the future” also “seems to have taken a toll on inventory behaviour”, noted Mr Coulton.

    Economists have pinned the gloomy investment figures partly on the sustained period of low oil prices, which spurred energy groups to dramatically pare down their capital spending plans and curtail drilling activity.

    The pain in the energy sector ricocheted elsewhere, particularly to American factories, as drillers have slashed orders for manufactured products. That has put additional pressure on a sector that was already grappling with a strong dollar and sluggish growth abroad.

    Still, executives at several US energy groups have noted in recent weeks that the downturn appears to have reached a trough. Echoing that message, economists at Goldman Sachs said on Wednesday that “we now seem to be finding a bottom” in the drag the energy sector is generating on capital spending.

    The weakness in investment was offset by consumption growth, which picked up to a 4.2 per cent pace in the second quarter, from 1.6 per cent in the first three months of 2016.

    Even though job growth was patchy in the three-month period — with May’s reading coming in at the slowest pace since 2010 — modest wage growth and low gasoline prices have been a boon to consumers.

    US exports were another bright spot, rising at a rate of 1.4 per cent in the second quarter after three straight quarters of declines. The figure may have been helped by a fall in the greenback against the currencies of America’s trading partners that began in the first quarter and stretched until early May.

    The GDP numbers have faced questions over the accuracy of statisticians’ efforts to correct for seasonal effects such as weather and major holidays.

    The BEA said in a separate analysis that there was indeed “residual seasonality” in real GDP numbers when examined over the most recent 10-year period and also over a 30-year timespan. It has been engaged in a programme of improvements to seasonal adjustments to reduce these effects.

    Updates to previously reported GDP figures from 2013 to 2015 unveiled on Friday showed upward revisions to the average first-quarter growth rate over that period, as well as to the third quarter, while the average second-quarter growth was somewhat weaker than previously reported.

    The figures came as part of a swath of updates to previously published numbers. Looking at the whole of 2015, the US economy grew 2.6 per cent compared with the previous year — higher than the 2.4 per cent as previously estimated. Growth in 2014 was unchanged at 2.4 per cent, while in 2013 GDP grew 1.7 per cent, a little higher than the last estimate.

    Additional reporting by Sam Fleming

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