SMM News: as the accelerated rise in consumer spending is likely to be offset by weak exports and business investment, US economic growth in the second quarter is likely to be the slowest in more than two years.
The expected slowdown comes against the backdrop of rising risks to the US economic outlook, particularly from global trade disputes and slowing overseas growth. These factors are expected to prompt the Fed to cut interest rates next Wednesday for the first time in a decade.
But with a strong labour market supporting consumer spending, there will be no recession in the near future. The U.S. Commerce Department will release its second-quarter gross domestic product (GDP) report at 20:30 Beijing time.
"the slowdown scared the Fed and the markets, but the sky didn't fall," said Ryan Sweet, a senior analyst at Moody's Analytics in Westchester, Pennsylvania. "if we do have a recession next year, it will be because we are causing trade tensions."
GDP is expected to grow at an annualised rate of 1.8% in the second quarter, down from 3.1% in the first quarter, according to the survey. The decline in growth has also been linked to slower inventory growth.
But with volatile export and inventory data as the main reason for the expected slowdown in GDP, if the economy grew at its slowest pace since the first quarter of 2017, it could mask some of the underlying strength during the decade of economic expansion.
The survey concluded before the release of wholesale and retail inventory data in June, earlier than the trade deficit in durable goods and goods, which prompted the Federal Reserve Bank of Atlanta to cut its economic growth forecast by 0.3 percentage points to 1.3 per cent.
The slowdown is largely due to the fading stimulus of the White House's $1.5 trillion tax cuts. The Trump administration has introduced tax cuts, coupled with increased spending and deregulation, to help boost sustainable annual economic growth by 3.0%.
The US economy grew 2.9 per cent in 2018 and is expected to be around 2.5 per cent this year. Analysts estimate that sustainable economic growth, which does not trigger inflationary pressures, is between 1.7 and 2.0 per cent.
"as the effects of fiscal stimulus fade, and trade policy uncertainty and slowing global demand continue to hinder corporate investment, US GDP growth should slow," said Sam Bullard, senior analyst at Wells Fargo Securities.
The GDP report is also expected to show a rise in inflation last quarter, although the overall inflation trend is likely to remain modest. The government will also release revised GDP data for the first quarter of 2014-2019.
Strong consumer spending
Consumer spending, which accounts for more than 2/3 of US economic activity, is expected to accelerate, slowing to 0.9 per cent in the first quarter, the lowest in a year. The slowdown in consumer spending at the start of the year was partly due to the partial shutdown of the government, which lasted 35 days. Unemployment is at its lowest level in nearly 50 years, boosting wages and supporting consumer spending.
But consumer spending growth is likely to be constrained by a sharp fall in exports, reversing strong growth in the first quarter. The export downturn is expected to worsen the trade deficit in the second quarter. The contribution of trade to (GDP) growth was believed to be negative in the last quarter, with a contribution of 0.94 percentage points in the first quarter.
Accelerated consumer spending could help companies reduce excess inventory, narrowing inventory growth. While this could put pressure on GDP growth in the second quarter, it could boost manufacturing. Companies are handling inventories of unsold goods, reducing orders to factories and curbing manufacturing production.
Business investment is likely to be weak in the second quarter and equipment spending is expected to shrink again, the biggest drop in three years in the first quarter.
Powell, chairman of the Federal Reserve, said earlier this month that corporate investment was one of the weak sectors of the economy, saying it had "slowed significantly", which could "reflect concerns about trade tensions and slowing global economic growth".
The design problems of Boeing, an aviation giant, have hurt corporate investment, which in turn has hit exports.
Boeing reported its biggest quarterly loss in its history on Wednesday because of a sharp increase in the cost of resolving the 737 MAX aircraft problem, Boeing warned that if the best-selling aircraft encountered new obstacles in getting global regulators to agree to fly again, Boeing may have to shut down the 737 MAX production line completely.
The 737 MAX was grounded worldwide in March after air crashes in Ethiopia and Indonesia. 737 MAX production has been reduced and delivery has been suspended. Analysts expect the problem with the 737 MAX to reduce GDP growth by at least 0.2 percentage points in the second quarter.
"there may be a more visible impact on multiple growth items, with weak equipment spending and exports, but the increase in inventories is partly offset by the increase in inventories," said Daniel Silver, an analyst at JPMorgan in New York.
Construction investment data, including oil and gas drilling, fell in the second quarter. Spending on knowledge products, including research and development, is likely to increase.
Government investment has grown strongly, but housing construction spending is likely to shrink for the sixth quarter in a row.
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