US economic growth seen stumbling as trade weighs on business

Washington

TRADE tensions likely helped push down US economic growth last quarter to match the slowest pace of Donald Trump's presidency, with a robust consumer keeping things from looking even worse.

Gross domestic product (GDP) figures due on Friday may show that business investment posted the first decline in three years. Uncertainty from the year-long US-China tariff war compounded weakness stemming from slowing global growth and falling oil prices.

GDP rose 1.8 per cent on an annualised basis in the second quarter, according to the median projection of analysts, which would be the slowest since 2017.

Net exports and inventories probably took a substantial bite in the April-June period, unwinding gains from the first quarter and reflecting fluctuations in companies' stockpiles - before and after various Trump tariff deadlines.

Together, those items undercut what likely was the strongest increase in consumer spending since 2014. Continued solid gains in jobs and wages prevented growth from sinking into the doldrums - at least for now.

The GDP report is unlikely to make much difference in a widely anticipated Federal Reserve move next week to cut interest rates by a quarter point. But the data will provide more detail on the state of the US economy to help frame the central bank's thinking on whether to follow up with additional easing this year, as investors are predicting.

Business investment "slowed more than we thought", said Michael Gapen, chief US economist at Barclays plc, who projected a 0.5 per cent drop amid weakness in equipment and structures. "It's that pronounced slowing that led us and others to call for Fed rate cuts."

While the 1.8 per cent growth estimate is not far below the average rate during a relatively tepid expansion, it would still be the weakest since Mr Trump took office in the first quarter of 2017. And it would mark a sharp decline from the 3.1 per cent pace at the start of 2019.

The Trump administration targets annual growth of 3 per cent, and the president has frequently complained that the Fed's interest rate increases under chairman Jerome Powell have held back the economy.

But it is the trade war that is partly holding things back now. Companies are hesitating to expand as they wait to see if the US and China resolve their differences, according to the Fed's Beige Book and other anecdotal evidence.

Caterpillar Inc, a frequent economic bellwether, said on Wednesday that tariffs are boosting production costs and competition in China is eating into sales.

The grounding of Boeing Co's 737 Max jet for safety reasons is also denting the economy, with the company's plane orders slowing to a trickle. The Institute for Supply Management's index of manufacturers' new orders fell in June to the lowest level since 2015, suggesting that broader factory weakness will persist in coming months.

Aside from those issues, a widening trade deficit and less inventory accumulation may have knocked as much as 1.7 percentage point off the headline growth figure, according to ING Bank NV. Those categories added a combined 1.5 point to growth in the first quarter. Imports likely jumped last quarter before the US and China reached a trade truce in late June.

"There certainly was still a lot of flux as far as businesses looking at the outlook in regards to trade and having to manage around that," said Sam Bullard, senior economist at Wells Fargo & Co.

Even so, the headwinds have not made much impact on the chief pillar of the economy - consumer outlays, which probably climbed at a 4 per cent pace during the period. Consumption looks to have rebounded from a paltry 0.9 per cent first-quarter rate, which reflected the federal government shutdown and extremely cold weather in parts of the US.

"The good news is that the consumer came roaring back in the second quarter," said Ryan Sweet, head of monetary policy research at Moody's Analytics Inc. "When you strip out net exports and inventories, that's really the engine of the economy."

With companies continuing to add workers at an elevated pace, and wage gains remaining solid, the Fed is seen favouring a less-dramatic quarter-point cut over a half-point reduction. The bigger question is whether the headwinds start filtering through to consumers.

"Does that potentially bleed over into the service sector and consumer spending? That's what they're looking at hard right now," Wells Fargo's Mr Bullard said. BLOOMBERG