U.S. GDP growth slows to 2%; government spending continues to fuel economy

The nation’s economy expanded at an annual rate of only 2% in the second quarter as government spending continued to soar and key industry sectors experienced downturns amid concerns of slower growth in the second half of 2019, according to the third and “final’ estimate released Thursday (Sept. 26) by the Bureau of Economic Analysis (BEA).

The last second quarter reading for the nation’s Gross Domestic Product annual growth is based on more complete source data than were available for the “second” estimate issued last month that was also 2%, but well below the 3.1% acceleration in the first quarter.

In its recent forecast correctly predicting the 2% second quarter expansion, the highly-watched Conference Board said U.S. growth has slowed to its long-term potential and is likely to remain at the current level for the foreseeable future.

“While the U.S. economy continues to stand on relatively firm ground, GDP growth has converged to its long-run trend of about 2%. Consumer spending growth is holding up, fueled by low unemployment and rising wages,” said the Conference Board, an independent, nonpartisan think tank made of senior executives across several industries.

Noting the continued impact of the $1.8 trillion 2017 Tax Cut and Jobs Act stimulus on the economy, the independent nonprofit think tank predicts the U.S. expansion will stall at 2% and 1.9% growth in the third and fourth quarters, respectively. That would put yearly growth at only 2.3% at the end of 2019.

“In contrast, business spending and investment are not providing much support to GDP. Additionally, net exports are and will continue to be a drag on overall growth while the U.S. dollar remains strong and imports outpace exports,” said the Conference Board’s quarterly forecast. “It is likely that some of these drags will be offset by stimulus, including increased federal nondefense government spending and monetary easing.”

Today’s lukewarm GDP report, which measures the value of the goods and services produced by the nation’s economy less the cost of the goods and services used up in production, adjusted for price changes, still pushes the ongoing expansion into its 121st month following the Great Recession in 2009 – the longest expansion in U.S. history.

Through June, the U.S. economy grew without any significant decline in economic activity for 120 months, tying the 1991-2001 period with former President Bill Clinton sandwiched between former Presidents George H. W. Bush and George W. Bush.

According to the BEA, there were positive contributions to GDP growth in consumer and government spending at all levels during the second quarter. However, those gains were partly offset by slumps in business investment, exports and commercial and residential new construction.

In view of that data, the National Association of Realtors also issued its monthly report today showing that pending homes sales in August saw a welcome rebound after a prior month of declines. The group’s Pending Home Sales Index (PHSI), a forward-looking indicator based on contract signings, climbed 1.6% to 107.3 in August, reversing the prior month’s decrease.

Year-over-year contract signings jumped 2.5%. All regional indices are up from July, with the highest gain in the West region. The PHSI in the Northeast rose 1.4% to 94.3 in August and is now 0.7% higher than a year ago. In the Midwest, the index increased 0.6% to 101.7 in August, 0.2% higher than August 2018. An index of 100 is equal to the average level of contract activity.

“It is very encouraging that buyers are responding to exceptionally low interest rates,” said Lawrence Yun, NAR chief economist. “The notable sales slump in the West region over recent years appears to be over. Rising demand will reaccelerate home price appreciation in the absence of more supply.”

Overall, BEA data shows profits from current production increased $75.8 billion in the second quarter in contrast to a decrease of $78.7 billion in the first quarter. Profits of domestic financial corporations increased $2.5 billion in the second quarter, compared with an increase of $22.2 billion in the first quarter.

Profits of domestic nonfinancial corporations increased $34.7 billion, in contrast to a decrease of $108.2 billion. Rest-of-the-world profits increased $38.7 billion, compared with an increase of $7.3 billion. In the second quarter, receipts increased $25.3 billion, and payments decreased $13.4 billion.

Meanwhile, real gross domestic income (GDI) increased 1.8% in the second quarter, compared with an increase of 3.2% in the first quarter. The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 1.9% in the second quarter compared to 3.2% in the previous quarter.

Current-dollar GDP increased 4.7%, or $241.5 billion, in the second quarter to a level of $21.34 trillion. In the first quarter, current-dollar GDP increased 3.9%, or by $201 billion. The price index for gross domestic purchases increased 2.2% in the second quarter, up from 0.8% in the three-month period ended March 31.

The PCE price index, a barometer of inflation growth, increased 2.4% for the three-month period ended June 30 compared to only 0.4% growth in the first quarter. Excluding food and energy prices, the second quarter PCE price index increased 1.9% from only 1.1% in the second quarter.

BULLARD: DOWNSIDE RISKS STILL AHEAD

Those inflationary pressures and other downside risks facing the U.S. economy may cause the slowdown to be sharper than expected, St. Louis Federal Reserve Bank President James Bullard said in a monetary policy presentation on Monday, noting the economy faces downside risk that may cause the slowdown to be sharper than expected.

“A sharper-than-expected slowdown may make it more difficult for the Federal Open Market Committee (FOMC) to achieve its 2% inflation target,” said Bullard, who oversees the Federal Reserve’s expansive Eighth District that includes all of Arkansas and six other states. “The FOMC may choose to provide additional accommodation going forward, but decisions will be made on a meeting-by-meeting basis.”

The Federal Reserve committee reduced the policy rate at its July 30-31 conference and again at its Sept. 17-18 meeting to 1-3/4 to 2%, where six panel members joined Federal Reserve Chair Jerome Powell. Voting against the action were Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4%. Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2- 2-1/4%.