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July 30, 2016

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Sluggish growth ruins hopes for firm rally in US

GROWTH in the US economy was sluggish again in the spring, dashing expectations for a robust rebound after a tough winter. Stronger consumer spending was offset by weakness in housing construction and a big slowdown in the pace that businesses restocked store shelves.

The Commerce Department said yesterday that the gross domestic product — the broadest measure of the economy — grew at a 1.2 percent annual rate in the April-June quarter. That was far below the 2.6 percent GDP growth rate that economists had been forecasting.

The government also revised down its estimate of first-quarter growth to 0.8 percent from 1.1 percent. The economy has now grown at lackluster rates for three straight quarters.

Despite the worse-than-expected performance in the second quarter, analysts said they remained hopeful that the economy will rebound in the second half of this year as some of the headwinds start to abate. Analysts said that businesses will likely ramp up inventories in the coming months.

Still, the weakness in the first and second quarters prompted analysts to trim their forecasts for total growth in 2016.

Paul Ashworth, chief US economist at Capital Economics, revised his GDP forecast for this year from 2 percent down to 1.5 percent, which would be the weakest showing since the economy contracted by 2.8 percent in 2009 as the country was struggling with a deep recession.

The government, in its annual revision of GDP released yesterday, boosted its growth reading for 2015 to 2.6 percent, up from its previous estimate of 2.4 percent.

Analysts said the disappointing second-quarter GDP report would likely give the Federal Reserve pause about raising rates as soon as September.

“The ongoing softness of growth in the second quarter will no doubt add to calls for policy-makers to err on the side of caution and as such greatly reduces the chance of any rate hike before December,” said Chris Williamson, an analyst with IHS Markit.

Consumer spending, which accounts for 70 percent of economic activity, did accelerate in the spring, growing at an annual rate of 4.2 percent. That was more than double the 1.6 percent rate in the first quarter. It was the strongest surge for consumer spending since the final three months of 2014.

But businesses slowed further restocking of their shelves, which cut growth by 1.7 percentage points in the second quarter. Businesses have struggled for over a year to get their stockpiles more in line with sales. The inventory slowdown in the spring was the sharpest since the first quarter of 2014.

Trade was a slight positive in the second quarter, adding 0.2 percentage points to growth. But the government sector trimmed growth by 0.2 percent, reflecting weakness at both the federal and state and local levels.

Housing construction, which has been a bright spot for the economy, shrank at an annual rate of 6.1 percent in the second quarter, reflecting weakness in both single-family and apartment building.


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