Q2 GDP Shows That U.S. Economy Stuck Well below 2% Growth Trend

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The U.S. Bureau of Economic Analysis today reported 1.2% annualized growth in real Gross Domestic Product for the second quarter of 2016. This is the third quarter in a row that growth is close to 1%, showing that the growth trend of the American economy seems on a path of dropping off significantly from its assumed 2% growth trend.

Second quarter growth came in well below expectations and provides more evidence that the economy has weakened so far this year. The economy continues to operate at two speeds, with businesses feeling some uneasiness while consumers remain buoyant. Businesses, though, continue to show more wariness about the strength of the economy which is reflected in the largest quarterly drop in private investment numbers since the beginning of the expansion. There are several factors driving this deteriorating investment environment. Aggregate corporate profits have been declining since the end of 2014 as a combination of weak inflation and rising wages have narrowed margins. Brexit and market volatility related to a perception of increased geopolitical risk may cause businesses to delay some elective investment despite low borrowing costs.

In contrast, personal consumption continues to grow at a strong pace. A tight labor market has produced steady wage growth and boosted consumption. Though residential investment declined sharply this quarter, its general trend remains positive as low mortgage rates have kept the housing market strong. Trade was also a bright spot as a strong dollar did not dent export growth this quarter. The divergence between consumer and business behavior will persist in the second half of the year with growth likely remaining below 2%.

Though the price index for Personal Consumption Expenditures rose nearer to the Federal Reserve’s 2% target, today’s report means that a rate hike before the end of the year is unlikely unless growth strengthens considerably in the coming months.