Struggling U.S. Economy Propped Up by Consumer-Spending Gain

Carlos Torres CarlosTorresECO

Lisa Du lisadont

July 29, 2016 — 12:56 PM VET Updated on July 29, 2016 — 2:55 PM VET

U.S. Economy Expands Less Than Forecast

• First half of year represents weakest start since 2011
• Companies cut back on stockpiles, equipment, construction

The U.S. economy stumbled in the first half of 2016 as companies retrenched, leaving consumers to shoulder the burden of sustaining growth heading into the presidential election.

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A 4.2 percent gain in household purchases in the second quarter, among the biggest of the current expansion, was the lone bright spot in an otherwise bleary picture as the economy had its worst first half since 2011. Businesses hunkered down, trimming inventories and reducing outlays on equipment and construction projects, while government agencies also cut back. That limited the gain in gross domestic product last quarter to a 1.2 percent annualized rate, figures from the Commerce Department showed Friday, less than half the advance projected by economists in a Bloomberg survey.

While the magnitude of the surge in consumer spending is unlikely to be sustained, a strong job market will probably give Americans the means to keep driving growth as Hillary Clinton and Donald Trump spar over who’ll lead the world’s largest economy. A contentious election and uncertain global growth prospects call into question whether companies will keep hiring at a rapid clip and be more willing to invest.
"I don’t think U.S. consumers can continue to do the kind of heavy lifting that they have done," said Millan Mulraine, deputy head of U.S. research and strategy for TD Securities USA LLC in New York. "It means we must have some hand off of that work from consumers to business investment in particular."

Sole Driver

Personal spending added 2.83 percentage points to second-quarter growth, while business investment, trade and government spending together subtracted 1.61 percentage points. That 4.4-point spread is the widest between the two groups since the end of 2001.
The passing of that baton is a shaky proposition given “the global uncertainty or even election uncertainty,” said Mulraine.
Last quarter’s disappointing gain in GDP followed a 0.8 percent advance the prior three months that was even smaller than previously estimated. The average 1 percent growth rate so far this year was the weakest first half since 2011.
The Commerce Department’s report also included revisions to data going back to 2013. The updated numbers showed a more pronounced slowdown in the economy heading into 2016. The year-over-year growth rate cooled from 3.3 percent in the first quarter of 2015 to 1.9 percent in the fourth quarter.

The year-over-year deceleration continued into 2016, reaching 1.2 percent in the second quarter, the worst performance since 2013. The slowdown may also change the calculus for the Federal Reserve, which has been trying to time its next interest rate hike. Earlier this week the U.S. central bank signaled the potential for an increase at some point this year.

The negative surprise “cuts the legs out from under our September Fed hike call,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd in New York, wrote in a note to clients. Officials “won’t take any comfort in today’s number.”
Some economists were more sanguine. Now that companies have cut back on the amount of goods on hand, any subsequent gains in consumer spending will be met by increased orders and production, which contribute to economic growth. Additionally, the plunge in oil drilling that’s weighed on business investment will probably subside now that oil prices have stopped falling.

‘More Balanced’

“We expect to see a little more balanced growth in the second half,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “There’ll be some steadying in capital spending because the energy cycle has stabilized. The inventory situation turns more favorable.”
Still, one pillar of consumer spending looked a little more tenuous. Readings on wages and salaries were revised down for the first quarter, leading to a $10.2 billion drop from the previous three months. Worker pay over the past six months was the weakest over a similar period in three years.

Also, should company confidence be shaken, equipment spending may not be the only thing companies decide to cut.
“The more immediate concern of persistently weak business investment spending is that it could at some point translate into diminished hiring if not outright layoffs, which in turn would take the rug out from under U.S. consumers,” Richard Moody, chief economist at Regions Financial Corp. in Birmingham, Alabama, said in a research note.