U.S. economy slowing, but consumers limiting downside

U.S. economic growth slowed in the second quarter, the government confirmed on Thursday, but the strongest consumer spending in 4-1/2 years amid a solid labor market threw cold water on financial market expectations of a recession, Trend reports citing Reuters.

Signs that the economy was growing at a moderate pace and not slowing rapidly were underscored by other data showing a narrowing in the goods trade deficit in July as exports rebounded. Businesses stepped up inventory accumulation last month, likely in anticipation that demand would remain strong.

Consumers have so far shown no signs of pulling back, with retail sales powering ahead in July. But there are fears the Trump administration’s year-long trade war with China, which will see additional tariffs on Chinese goods coming into effect in September and December, could take the sails out of consumer spending.

The deterioration in trade relations between the two economic giants has roiled global stock markets and triggered an inversion of the U.S. Treasury yield curve, fanning fears that the longest economic expansion in history was in danger of being interrupted by a recession.

Federal Reserve Chair Jerome Powell said last week that the economy was in a "favorable place,” but reiterated that the U.S. central bank would "act as appropriate” to keep the economic expansion on track.

"The economy is still on cruise control and growing at a slow but steady pace that looks sustainable as the trade wind skies continue to darken,” said Chris Rupkey, chief economist at MUFG in New York.

Gross domestic product increased at a 2.0% annualized rate, the government said in its second reading of second-quarter GDP on Thursday. That was a downward revision from the 2.1% pace estimated last month.

The small downgrade was in line with economists’ expectations. The economy grew at a 3.1% rate in the January-March quarter. It expanded 2.6% in the first half of the year.

The dollar .DXY rose against a basket of currencies, while U.S. Treasury prices fell. Stocks on Wall Street rose, boosted in part by a hopeful tone from China on a resolution of the trade dispute with Washington.

When measured from the income side, the U.S. economy grew at a 2.1% rate in the second quarter. Gross domestic income (GDI) increased at a 3.2% pace in the January-March quarter.

The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, rose at a 2.1% rate last quarter, slowing from a 3.2% pace of growth in the first three months of the year.

The income side of the growth ledger was supported by a rebound in profits after two straight quarterly declines. After-tax profits without inventory valuation and capital consumption adjustment, which correspond to S&P 500 profits, increased at a 4.8% rate after dropping 1.5% in the first quarter.

The economy is largely losing speed as the stimulus from the White House’s $1.5 trillion tax-cut package and a government spending blitz fades. Economists are forecasting growth this year around 2.5%, below the Trump administration’s 3% target.