WASHINGTON — The U.S. economy slowed sharply in the April-June quarter even as consumers stepped up their spending.
The gross domestic product, the economy’s total output of goods and services, grew at a 2.1% annual rate last quarter, down from a 3.1% gain in the first quarter, the Commerce Department estimated Friday.
But consumer spending, which drives about 70% of economic activity, accelerated to a sizzling 4.3% growth rate after a lacklustre 1.1% annual gain in the January-March quarter, boosted in particular by auto sales. The resurgent strength in household spending was offset by a widening of the trade deficit and slower business inventory rebuilding.
Economists also noted that business capital investment fell in the April-June quarter for the first time in three years. That weakness likely reflects some reluctance by businesses to commit to projects because of uncertainty surrounding President Donald Trump’s trade war with China.
Indeed, most analysts think the U.S. economy could slow through the rest of the year, reflecting global weakness and the trade war between the world’s two largest economies.
This week, the International Monetary Fund downgraded its outlook for the world economy because of the trade conflict. China’s own growth sank last quarter to its lowest level in at least 26 years after Trump raised his tariffs on Chinese imports to pressure Beijing over the tactics it’s using to challenge U.S. technological dominance. Economists say China’s slowdown might extend into next year, which would have global repercussions because many countries feed raw materials to Chinese factories.
Europe, too, is weakening in the face of global trade tensions — a concern that led the European Central Bank to signal that more economic stimulus could be coming soon.
The global weakness is a key reason why the Federal Reserve is widely expected to cut interest rates next week for the first time in more than a decade and to signal that it may further ease credit in the months ahead.
Sung Won Sohn, a business economist at Loyola Marymount University in California, noted the disparity between solid U.S. consumer spending and tepid corporate investment.
“Consumers and businesses are going their separate ways,” Sohn said. “If the pattern continues, it is not a good sign for the economy because there would be fewer jobs. For this reason, the Federal Reserve will go ahead with an interest-rate cut next week.”
Larry Kudlow, head of the president’s National Economic Council, blamed last year’s four rate increases by the Fed, rather than Trump’s trade policies, for last quarter’s drop in business investment.
“I don’t think the trade factor is nearly as important as the monetary factor,” Kudlow said in a CNBC interview Friday. “I am hoping that monetary policy makes the shift that investors are expecting.”