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Economic Report: The economy slows to 2.1% growth in the spring as businesses retrench, GDP shows

The economy got a jolt of adrenaline in the spring from the biggest increase in household spending in a year and a half, but falling business investment kept a lid on second-quarter growth and signaled potential trouble ahead. GDP grew at a 2.1% annual pace vs. 3.1% in the first quarter. Read More...
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Life’s a beach? Maybe not, but Americans live it up in Santa Monica. Consumer spending rose in the second quarter by the most in a year and a half.

The numbers: The economy got a jolt of adrenaline in the spring from the biggest increase in household spending in a year and a half, but falling business investment kept a lid on second-quarter growth and signaled potential trouble ahead.

Gross domestic product, the official report card on the economy, grew at a 2.1% annual pace from the start of April to the end of June, the government said Friday. GDP slowed from a 3.1% gain in the first three months of the year.

Economists polled by MarketWatch had expected a 1.9% GDP reading.

The details of the report show that in some ways the economy was stronger in the second quarter than it was at the start of the year, especially on Main Street.

Yet a loss of momentum among business, especially exporters and manufacturers, suggest the economy could expand more slowly in the second half of the year. The Federal Reserve is prepared to cut already low interest rates as soon as next week to give the economy a mostly symbolic boost.

Read: Durable-goods orders post first gain in three months, investment also picks ups

What happened: Americans spent considerably more in the spring compared to the start of the year, when they were recovering from the holiday shopping season, coping with a government shutdown and bearing the brunt of winter weather.

Consumer spending jumped 4.3% after a lackluster 1.1% gain in the first quarter. Households spent more on new cars and trucks, food and drinks and clothing.

The situation was reversed for business. Fixed investment fell 0.8% to mark the biggest drop in three and a half years.

Investment slumped almost 11% on in structures such as office buildings, manufacturing plants and drilling rigs. Spending on equipment rose less than 1%.

Executives have hesitated to make big spending plans amid a festering Trump administration trade dispute with China and a deteriorating global economy harmed in part by trade tensions.

Outlays also slipped 1.5% on residential housing — the sixth decline in a row — reflecting tougher times for home builders. High prices and difficulty obtaining inexpensive lots have dented sales.

The value of inventories, or goods waiting to be sold, also shrank by $44.3 billion. That’s the biggest drawdown in a year and it knocked almost a full percentage point off GDP. Had inventories remained neutral, the economy would have expanded at a 3% annual pace.

A bigger U.S. trade deficit also exerted some drag instead of adding to GDP as it did in the first quarter. Imports rose slightly while exports sank 5.2%.

U.S. tariffs appear to have throttled demand for some Chinese imports while exports have suffered from retaliatory measures, a strong U.S. dollar and a fading global economy.

Government spending, meanwhile, climbed 5% in the spring. The increase partly reflected a rebound in federal outlays after the end of a partial shutdown in January.

Inflation as measured by the Fed’s preferred PCE index rose at a mild 1.4% clip year over year.

Big picture: Households are carrying the ball while businesses sit on the sidelines.

Consumers account for almost 70% of all spending in the economy. Buoyed by steadily rising incomes, more job security and the lowest unemployment rate in almost 50 years, they are spending more than enough to keep the U.S. growing around 2% a year.

Read: The economy has become a rowboat with just one oar doing most of the work

It might not be enough, however. Businesses will eventually cut jobs or reduce worker hours if growth doesn’t pick up — a potential threat to the golden goose known as the American consumer.

To prevent that from happening, the Fed is prepared to cut interest rates soon even in the face of record stock prices and the best labor market in decades.

Read: The last time inflation ran consistently above 3% was 26 years ago

What they are saying?: “Even in the face of a variety of sources of uncertainty and broad indications that the economy slowed in recent months, the first look at [second-quarter] growth holds more positives than negatives,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Certainly weaker business investment shouldn’t be overlooked, but the strength of the consumer sector also shouldn’t be dismissed.”

“Given the persistent protectionist draft, the lingering policy uncertainty breeze, the sniffling global economy, and the cooling room temperature at home, now may be an opportune time for a Fed immunization shot,” economists Gregory Daco and Jake McRobie told clients in a note.

Market reaction: The Dow Jones Industrial Average DJIA, +0.10% and S&P 500 SPX, +0.47% rose slightly in Friday trades. Stocks have been trading at or near record highs for the past week.

The 10-year Treasury yield TMUBMUSD10Y, -0.43% was little changed at 2.07%.

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