Consumers seen powering U.S. economic growth in second quarter

[July 29, 2016]  By Lucia Mutikani

WASHINGTON (Reuters) - The U.S. economy likely regained speed in the second quarter as robust consumer spending offset a sharp moderation in inventory investment and weak exports, pointing to underlying growth momentum that could be maintained for the rest of the year.

Gross domestic product probably increased at a 2.6 percent annual rate, which would be the fastest in a year, according to a Reuters survey of economists. The economy grew at a 1.1 percent pace in the first quarter.

"The economy clearly bounced back in the second quarter because consumers put the economy on their backs. Things are falling in place, the economy will continue to move forward," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

The Commerce Department will publish its advance second-quarter GDP growth estimate on Friday at 08:30 a.m. (1230 GMT).

There are, however, downside risks to the forecast after data this week showed weak orders for manufactured capital goods in June, as well as a widening in the goods trade deficit and moderate inventory accumulation.

With the Federal Reserve watching the labor market and persistently low inflation, a pick-up in growth in the second quarter, which officials at the central bank are also anticipating, is not expected to have an impact on the outlook for interest rates in the short term.

The Fed, which on Wednesday left interest rates unchanged, said near-term risks to the economic outlook had "diminished." The Fed raised its benchmark overnight interest rate in December for the first time in nearly a decade.

"The worry for the Fed is that you have a two-sided economy with strong consumer spending but weak investment. They will continue to put a rate hike on the table but they will end up procrastinating," said Thomas Costerg, a senior U.S. economist at Standard Chartered Bank in New York.

CONSUMERS SHINE

With the second-quarter GDP snapshot, the government will also publish revisions to data going back to 2013 through the first quarter of 2016. The revisions are expected to partially address measurement issues, which have tended to lower first-quarter GDP estimates.

Consumer spending was likely responsible for almost all of the rebound in GDP growth last quarter. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is expected to have increased at its fastest pace since 2006.

That rate of growth is probably unsustainable, but economists say a tightening labor market, rising house prices and higher savings should underpin spending for the rest of 2016.

Shoppers ride escalators at the Beverly Center mall in Los Angeles, California November 8, 2013. REUTERS/David McNew/File Photo

"There are good reasons to expect strong consumption," said Anthony Karydakis, chief economic strategist at Miller Tabak in New York. "As long as you see the strength in consumption continuing, that gives a very reliable marker of the underlying momentum in the economy."

Economists expect a marginal impact on growth from Britain's departure from the European Union. They estimate that the so-called Brexit could subtract about two-tenths of a percentage point from GDP growth over the next year.

Businesses likely pulled back sharply on their pace of inventory accumulation, which could result in inventory investment subtracting as much as one percentage point from GDP growth. That would be the fourth straight quarter that inventories have weighed on output.

But a smaller inventory build is a good signal for growth in the coming quarters.

The lingering effects of the dollar's rally and weak global demand probably continued to hobble exports in the second quarter, while imports poured in to meet robust domestic demand. Trade is expected to have been a drag on GDP growth after making a modest contribution in the first quarter.

Business spending is expected to have contracted for a third consecutive quarter, the longest stretch since the 2007-2009 recession, though the pace of decline likely slowed.

Business spending has been hurt by lower oil prices, which have squeezed profits in the energy sector, forcing companies to cut capital spending budgets. Economists say uncertainty over global demand and the upcoming U.S. presidential election are also making companies cautious about spending.

Investment in residential construction and spending by the government likely fell in the second quarter. Economists say the decline will be payback after strong gains in the first quarter.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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