U.S. Economy Slows Less Than Expected to 2.1% but Fed Still Poised to Cut

U.S. gross domestic product slows to 2.1% in the three months through June from 3.1% in the first quarter. The second-quarter rate exceeded economists' average estimate for 1.8% growth.
By Bradley Keoun ,

The U.S. economy slowed last quarter, the Commerce Department reported Friday, as the impact of President Donald Trump's late-2017 tax cuts continued to fade and the potential fallout from his trade war with China created anxiety among many investors and business executives.

Gross domestic product, or GDP, the broadest gauge of economic activity, fell to 2.1% from 3.1% in the first quarter, the Commerce Department's Bureau of Economic Analysis said in a press release.

But in a sign that activity might be improving, the second-quarter's pace exceeded economists' average estimate for 1.8% growth.

The GDP growth reflected increased consumer spending, federal government spending and state and local government spending, partly offset by decreases in private inventories, exports, business investments and home improvements, according to the bureau.  

"Robust domestic consumers are more than offsetting the headwinds of a weakening manufacturing economy," Michael Reynolds, investment officer at the money manager Glenmede, which administers the Pew Memorial Trust, said in e-mailed remarks. 

The stronger-than-expected report likely will do little to change expectations that the Federal Reserve will cut interest rates at a meeting next week for the first time in more than a decade.

Fed Chairman Jerome Powell has said in recent speeches that monetary policy might need to be more "accommodative" -- central-bank jargon for lower rates -- due to a slowdown in the global economy that could affect U.S. markets. 

That's the main argument, since most economists say a recession isn't likely anytime soon, and the U.S. unemployment rate is close to its lowest in a half century. Stock markets are charting new highs.

"Overall economic growth is slowing, but is not slow," David Berson, chief economist for the insurer Nationwide, said in an e-mail.

Trump has called repeatedly for the Fed to cut interest rates, though some observers say he may just be trying to pull every lever to support the economy ahead of next year's presidential elections.

A Fed rate cut would bolster the economy by making it cheaper and easier for businesses and households to take on more debt, which in turn typically fuels more spending.

But looser monetary conditions would increase the chances of risky asset bubbles -- in home prices, for example -- or of an unwanted inflation spike, while leaving the Fed with a smaller arsenal of options to fight a recession when one eventually arrives.     

"This economy is not broken, and it does not need Fed action to fix it, but it will get it," said Ian Shepherdson, chief economist at the forecasting firm Pantheon. 

Recent data on manufacturing and the housing market have been stronger than expected, and in the Fed's defense, some economists say the mere anticipation of rate cuts might already be flowing through financial markets, and boosting output. So that could explain why many economic data reports have been beating Wall Street estimates.   

For all of 2019, the U.S. economy is expected to grow by 2.5%, down from 2.9% in 2018, based on a survey by the data provider FactSet.

Such growth rates are below the 3% long-term growth rate that Trump promised when he pushed for the $1.5 trillion of tax cuts in 2017.

Even so, U.S. growth is still far outpacing Germany's projected 0.7%, and Japan's 0.8%, and China's official growth rate is estimated to slow to 6.2% from 6.6% last year.    

One concern over slowing growth abroad is that the U.S. dollar could strengthen relative to foreign currencies, which would make it harder for U.S. manufacturers to compete in international export markets.   

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