Second-Quarter US Growth Rate of 2.6% Underscores Resilience

Pickups in consumer and business-equipment spending powered a U.S. economic rebound in the second quarter, signaling the eight-year expansion is on track to be sustained, Commerce Department figures showed Friday in Washington.

Gross domestic product rose at a 2.6% annualized rate from prior quarter (est. 2.7%); first-quarter growth revised to 1.2% from 1.4%.

Consumer spending, the biggest part of the economy, grew 2.8% (matching est.) after a 1.9% gain.

Nonresidential fixed investment climbed 5.2%.

Trade added to growth as exports rose faster than imports; inventories were a slight drag.

Key Takeaways

The results confirm that the slowdown at the start of 2017 was temporary and show an economy growing in the first half at about a 1.9% rate, compared with the expansion’s 2.2% average pace through the end of 2016.

Consumer spending led the rebound last quarter, helped by a steady job market and household finances boosted by stock and home-equity gains. Disposable incomes, adjusted for inflation, posted the best back-to-back quarters since the first half of 2015.

Business investment in equipment rose at an 8.2% pace, the most in almost two years, signaling companies are optimistic about demand in the U.S. as well as in overseas markets. The overall pace of nonresidential investment eased from 7.2% amid a slowdown in the structures category that followed a boom in oil-and-gas wells in the prior period. Intellectual-property investment also slowed.

A particular weak spot last quarter was residential investment, which fell by the most since 2010 following a strong gain in the previous period. Builders are coping with a shortage of available labor and lots, and warm weather in the first quarter may have pulled forward some activity.

Price data in the report indicated that inflation moved away from the Federal Reserve’s 2% goal. Excluding food and energy, the Fed’s preferred price index, tied to personal spending, rose at a 0.9% annualized rate last quarter, matching the weakest gain since 2010.

Even so, the results are unlikely to deter Fed policy makers from implementing plans to begin shrinking their $4.5 trillion balance sheet in the coming months and continuing a gradual pace of interest-rate increases. Fed officials said in a statement Wednesday after their latest meeting that they still expect inflation to stabilize around their objective “over the medium term.”

In addition to the pickup last quarter, results for the first three months of the year showed the economy had slightly more tepid growth than previously reported, in part because of a bigger drag from inventories and weaker business investment. At the same time, economic growth from 2014 to 2016 was marked up to an average annual rate of 2.2% from 2.1%, according to annual revisions.

The rebound in consumer spending is “supported by very constructive household fundamentals,” Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC, said in a note before the report.

Additional Details

Nonresidential fixed investment, which includes spending on equipment, structures and intellectual property, added 0.64 percentage point to growth.
Residential investment shrank at a 6.8% rate.
Net exports added 0.18 percentage point to growth, similar to the previous period; inventories subtracted 0.02 point after a 1.46-point drag in the first quarter.
Stripping out trade and inventories -- the two most volatile components of the GDP calculation -- so-called final sales to domestic purchasers rose 2.4%, equal to the previous quarter’s pace.
Government spending increased at a 0.7% rate, adding 0.12 point to growth, on national defense spending; state and local outlays fell 0.2%.
After-tax incomes adjusted for inflation increased at a 3.2% annual pace, the most in two years, after 2.8% in the previous period; saving rate slipped to 3.8% from 3.9%.

This GDP report is the first of three estimates for the quarter; others are due in August and September as more data become available Employment-cost index rose 0.5% in second quarter (forecast was 0.6%) after 0.8% in previous period, according to separate Labor Department report Friday.

By Shobhana Chandra