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WASHINGTON (MarketWatch) — The U.S. economy grew at a lackluster 1.1% pace in the second quarter, a touch slower than previously reported, in a period marked by weak business investment and government spending.
The big news: corporate profits fell again. Adjusted pretax earnings dropped 1.2% to mark the fifth decline in the past six quarters, the Commerce Department reported. Unless profits turn up again, the economy is unlikely to grow much faster.
Yet by and large, the government’s second recalculation of gross domestic product in the April to June period showed few major changes. Initially GDP was estimate to have expanded at a 1.2% annual rate.
Fresh evidence shows that imports rose instead of falling, consumer spending was even better than initially reported and government outlays fell more sharply. Business investment remained weak.
Early signs in the third quarter with a little over a month to go point to somewhat faster but not breakneck growth. Economists polled by MarketWatch predict GDP will rise to 2.2%.
Hiring accelerated during the summer, manufacturers have shown some improvement and the slumping U.S. energy industry appears to have stabilized.
“The second quarter GDP report was disappointing, but growth should bounce back in the third quarter,” said Stuart Hoffman, chief economist at PNC Financial Services.
Against that backdrop, the Federal Reserve could raise interest rates before the end of the year. Fed Chairwoman Janet Yellen on Friday hinted that an improving economy may pave the way for a rate hike soon.
In the spring, the economy got a jolt from consumers whose spending rose a revised 4.4%, the biggest gain in two years. Americans spent more on new autos and an array of goods and services.
Consumers account for 70% of U.S. economic activity and they are likely to continue to spend at a rate that keeps the economy churning forward. Wages are creeping higher and unemployment is the lowest since before the Great Recession.
The big question is whether businesses pull the reins on hiring amid a downturn in profits. Yet the weakness in earnings has largely been confined to energy and manufacturing, especially export-intensive businesses. Financial and service-oriented companies that employ the vast majority of Americans are doing better.
Businesses cut fixed investment by 2.5% in the second quarter. Inventories fell by a revised $12.4 billion, the first decline since 2011.
One good sign: outlays on intellectual property tied to research and development was revised to show a 8.6% increase instead of 3.5%.
Investment in new housing also fell sharply in the spring — down a revised 7.7% vs. an initial 6.1% — but that appeared to reflect a seasonal swing. Sales of new homes keep rising and builders plan to ramp up construction.
Exports rose 0.4% in the second quarter. Imports were revised to show a 0.3% increase vs. an earlier estimate of a 0.4% decline.
Government spending, meanwhile, fell a stiffer 1.5% instead of 0.9%, mostly because of lower state and local outlays.
Inflation as measured by the PCE price index rose at a 2% annual rate. “Core” inflation climbed at a 1.8% rate when the volatile food and energy categories are stripped out.
