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U.S. Economy Misses Q2 Expectations

The American economy expanded less than expected in the second quarter of 2016, though a rise in consumer spending indicates promise for the rest of the year. Gross domestic product increased at an annual rate of 1.2% during April, May and June, falling below economists’ predictions of a 2.6% rise in growth and landing just above a downwardly revised .8% for the first quarter, the Commerce Department reported.

Analysts say that businesses are acting cautiously, cutting back on investments and reducing stockpiles, as a result of low oil prices, weak global markets and uncertainty over the U.S. presidential election. Inventory accumulation by businesses fell $8.1 billion, the first drop since the third quarter of 2011 and down from a $40.7 billion increase in the first quarter. Corporate spending on equipment fell 3.5%, contracting for a third consecutive quarter, the longest stretch since the recession in 2008-2009. Private fixed investment, which includes residential and business spending, dropped 3.2% in the second quarter, the most in seven years.

More optimistically, consumer spending increased 4.2%, the fastest pace since the fourth quarter of 2014. It accounted for almost all of the GDP growth in the second quarter. Exports also rose in the second quarter as trade added .23 percentage points to GDP growth.

Accounting for the U.S. quarterly GDP and other economic factors, The Federal Reserve left interest rates unchanged in its most recent meeting last week. It did report that risks to the U.S. outlook have “diminished” as a tightening labor market, rising house prices and higher savings bode well for an increase in borrowing costs.

“We’re just muddling through,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, told Bloomberg. “Consumer spending looks good, but the problem is that the rest of the economy is soft. The economy remains vulnerable to downside risks. The Fed is right to be cautious.”

The Commerce Department also revised data going back to 2013 through the first quarter of 2016. GDP growth in the first quarter of 2015 was revised sharply higher to a 2% rate from the previously reported 0.6% pace.

The promotional product industry experienced similar growth in this year’s second quarter. ASI previously reported that distributors increased their sales by 3.2% in the quarter, compared with 3.1% in last year’s second quarter. The Counselor Confidence Index, which gauges the health and optimism of distributors, has stayed flat at 111, the same as the first quarter of this year, but is down from 114 in Q4 of 2015.