Declining inventories curb U.S. second-quarter growth; consumption surges

August 26, 2016 08:39 AM

U.S. economic growth was a bit more sluggish than initially thought in the second quarter as businesses aggressively ran down stocks of unsold goods, offsetting a spurt in consumer spending. 

Gross domestic product expanded at a 1.1% annual rate, the Commerce Department said today in its second estimate of GDP. That was slightly down from the 1.2% rate it reported last month.

The revision, which was in line with economists' expectations, also reflected more imports than previously estimated as well as weak spending by state and local governments. The economy grew at a 0.8% pace in the first quarter. It grew 1.0% in the first half of 2016. 

The economy has struggled to regain momentum since output started slowing in the last six months of 2015, which puts it in danger of stalling.

While data so far for the third quarter has been mixed, a buoyant labor market should continue to support consumer spending and underpin growth. Output will also likely get a boost as businesses restock warehouses after liquidating inventories in the second quarter.

The GDP data likely has no impact on the near-term outlook for monetary policy. Federal Reserve Chair Janet Yellen could offer guidance on interest rates today when she addresses the annual global central bankers' gathering in Jackson Hole, Wyoming.

The U.S. central bank hiked interest rates at the end of last year for the first time in nearly a decade, but has held them steady since amid concerns over persistently low inflation. Most economists expect another rate hike in December.

The dollar slightly trimmed losses against a basket of currencies after the data, while U.S. stock futures were little changed. U.S. Treasuries rose.

The government also reported that after-tax corporate profits fell at a 2.4% rate last quarter after increasing at an 8.1% pace in the first quarter. Weak profits could limit an anticipated rebound in business spending. 

With profits declining, an alternative measure of growth, gross domestic income, or GDI, increased at only a 0.2% rate in the second quarter, the weakest since the first quarter of 2013. GDI measures the economy's performance from the income side. It increased at a 0.8% pace in the first quarter.

Investors plunge 

Business inventories fell $12.4 billion in the second quarter, the first drop since the third quarter of 2011, instead of the $8.1 billion reported last month. 

As a result inventories sliced off 1.26 percentage points from GDP growth, the largest drag in more than two years, and up from the 1.16 percentage points subtraction in last month's estimate.

It was the fifth straight quarter that inventories weighed on output. Economists say some of the inventory drawdown could partially be attributed to robust consumption.

Consumer spending, which makes up more than two-thirds of U.S. economic activity, was revised up to show it increased at a 4.4% rate -- the fastest since the fourth quarter of 2014. Consumer spending, which was previously reported to have advanced at a 4.2% rate, accounted for the bulk of the rise in output last quarter. 

With consumption accelerating, imports were revised to show them growing at a 0.3% rate instead of declining at a 0.4% rate. There was also a modest downward revision to export growth. As a result, trade contributed one-tenth of a percentage point to GDP growth in the second quarter instead of 0.23 percentage point as reported last month.

Business spending on equipment fell at a 3.7% rate and not the 3.5% pace reported last month. Business spending on equipment contracted for a third consecutive quarter, the longest stretch since the 2007-2009 recession, though the pace of decline slowed. 

Business spending has been hurt by cheap crude, which has squeezed profits in the energy sector, forcing companies to cut capital spending budgets. There are signs that the worst of the decline is probably over, with a report on Thursday showing demand for manufactured capital goods rising in July for a second straight month.

There were also downward revisions to investment in nonresidential structures, which include oil and gas wells. Residential construction spending estimates were also trimmed.

About the Author