U.S. economy's rate of growth declines to 2.1%

2Q slowdown said to reflect trade war, global weakness

Containers wait to be loaded onto trucks Monday at the Port of Oakland, Calif. Growth in the U.S. economy has slowed, but economists say it remains strong, with government spending helping it along.
Containers wait to be loaded onto trucks Monday at the Port of Oakland, Calif. Growth in the U.S. economy has slowed, but economists say it remains strong, with government spending helping it along.

The U.S. economy's growth is slowing, dragged down by trade tensions and weak growth overseas. But data released Friday show there are few signs that the decadelong expansion is on the verge of stalling out.

Gross domestic product, the broadest measure of goods and services produced in the economy, rose at a 2.1% annual rate in the second quarter, according to preliminary data from the Commerce Department.

That is significantly lower than the 3.1% growth rate in the first quarter, and it falls short of the 3% target that President Donald Trump has repeatedly promised. Data revisions released Friday showed that GDP grew 2.5% for all of 2018, down from the 3% that was previously reported.

In the most recent quarter, consumer spending, which drives about 70% of economic activity, accelerated to a 4.3% growth rate after a lackluster 1.1% annual gain in the January-March quarter, boosted in particular by auto sales. The resurgent strength in household spending was offset by a widening of the trade deficit and by the slower rebuilding of business inventory.

Government spending, which picked up in the second quarter after being depressed by a lengthy federal shutdown in the previous period, also helped lift growth.

But other parts of the economy look much weaker. Residential investment, which includes housing construction, declined for the sixth consecutive quarter. Business investment also declined, and exports slumped as manufacturers were battered by tariffs and by slowing demand from overseas.

Economists also noted that business capital investment fell in the April-June quarter for the first time in three years. That weakness likely reflects some reluctance by businesses to commit to projects because of uncertainty surrounding the U.S.' trade war with China.

Indeed, most analysts think the U.S. economy could slow through the rest of the year, reflecting global weakness and the trade war between the world's two largest economies.

"It's a good economy, but it's got fragilities in it," said Diane Swonk, chief economist for the accounting firm Grant Thornton. "You'd expect to feel more euphoria and more underlying strength, and instead what we're seeing is fault lines."

This week, the International Monetary Fund downgraded its outlook for the world economy because of the trade conflict. China's own growth sank in the previous quarter, to its lowest level in at least 26 years, after Trump raised tariffs on Chinese imports to pressure Beijing over the tactics it's using to challenge U.S. technological dominance. Economists say China's slowdown might extend into next year, which would have global repercussions because many countries feed raw materials to Chinese factories.

Europe, too, is weakening in the face of global trade tensions -- a concern that led the European Central Bank to signal that more economic stimulus might be introduced soon.

The global weakness is a key reason why the Federal Reserve is widely expected to cut interest rates next week for the first time in more than a decade and to signal that it may further ease credit in the months ahead.

BLAMING THE FED

Sung Won Sohn, a business economist at Loyola Marymount University in California, noted the disparity between solid U.S. consumer spending and tepid corporate investment.

"Consumers and businesses are going their separate ways," Sohn said. "If the pattern continues, it is not a good sign for the economy because there would be fewer jobs. For this reason, the Federal Reserve will go ahead with an interest-rate cut next week."

Larry Kudlow, head of the president's National Economic Council, blamed last year's four rate increases by the Fed, rather than Trump's trade policies, for the quarter's drop in business investment.

"I don't think the trade factor is nearly as important as the monetary factor," Kudlow said in a CNBC interview Friday. "I am hoping that monetary policy makes the shift that investors are expecting."

Trump through a series of tweets has been pressuring the Fed to start cutting rates. Economists expect a quarter-point reduction in the federal funds rate, which influences many consumer- and business-loan rates, when the central bank meets next week.

Responding to Friday's economic report, Trump tweeted: "Q2 Up 2.1%. Not bad considering we have the very heavy weight of the Federal Reserve anchor wrapped around our neck. Almost no inflation. USA is set to Zoom!"

Later, speaking to reporters in the Oval Office about the Fed, Trump said, "They acted too soon and too violently" in raising rates nine times since late 2015. Trump also complained about the Fed's effort to reduce its bond holdings, saying that was driving up rates as well.

Trump said that without the Fed's tightening moves, growth would have been 4.5% in the second quarter instead of 2.1%. He said the Dow Jones industrial average, which along with other stock gauges has been setting record highs, would be 5,000 to 10,000 points higher.

"I am not a fan," Trump said of Fed Chairman Jerome Powell.

Asked whether he felt that the dollar was too high against other currencies, making it harder to export U.S. products, Trump said a strong dollar "is a beautiful thing in a way, but it makes it very hard to compete."

Kudlow told reporters earlier Friday that the administration had a White House meeting recently and ruled out intervening in currency markets to weaken the dollar. But in his comments with reporters, Trump seemed to leave the door open to such a move, which could violate commitments the United States has made with other major economies not to manipulate currencies to gain trade advantages.

2018 REVISION

On Friday, in addition to issuing its first of three estimates of growth in the April-June quarter, the government reported that by one measure, the economy grew more slowly in 2018 than it had previously estimated. As part of its annual revisions to gross domestic product, the government downgraded its estimate for 2018 growth from 3% to 2.5%.

Trump had frequently boasted of the now-downgraded 3% gross domestic product figure for 2018 as evidence that his policies have invigorated the economy.

For the January-March quarter, a narrower trade deficit and a surge in business restocking had contributed 1.3 percentage points to the 3.1% annual gain. But economists had cautioned that this strength was likely to be temporary.

For the second half of this year, economists predict the gross domestic product will grow at a modest annual rate of 2% or slightly lower, leading to growth for the full year of about 2.5%.

That would mark a disappointment to the Trump administration, which is forecasting that Trump's economic policies of tax cuts, deregulation and tougher trade enforcement will lift the U.S. economy to sustained gains of 3% or better in the coming years. Trump often cites the economy's performance at his campaign rallies, saying his policies have lifted the U.S. out of a decadelong slowdown that he blames on the policies pursued by former President Barack Obama's administration.

While economists see the Republicans' tax-cut law approved in late 2017 as a key factor in boosting growth last year, they expect the effect of those cuts to fade this year. Most think this would leave the economy growing close to the annual average of 2.3% that has prevailed since the economic expansion began in June 2009.

Information for this article was contributed by Martin Crutsinger of The Associated Press and by Ben Casselman of The New York Times.

A Section on 07/27/2019

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