US economic growth more than doubles to 2.6% in second quarter

Gross domestic product (GDP) increased 2.6 percent in the April-June period, compared to 1.2 percent in the first quarter, the Commerce Department reported.

The preliminary result, which is calculated from incomplete data and will be revised in the coming months, undershot analyst expectations by two tenths of a point and portrayed an economy facing significant headwinds.

A widening trade gap as well as slowing housing sales, business inventories, fixed investment and spending by state and local governments all weighed on growth, according to the report.

After a slow start to the year, many economists had expected the spring rebound, given that first quarters have tended to see relatively slow growth in recent years.

But the second quarter result, when added to a two-tenths downward revision to the first quarter, put growth in the first half of 2017 at only 1.9 percent — above the 1.5 percent recorded last year but below the 2.2 percent average of the prior three years.

– Defense spending booming –

Defense spending was a key driver, rising at the fastest pace in six years at 5.2 percent, more than offsetting the drop in non-defense spending which sank 1.9 percent, the biggest loss since 2013.

Personal consumption spending jumped to 2.8 percent from 1.9 percent in the first quarter, and exports of services likewise blossomed, adding 6.5 percent, the largest quarterly gain in more than four years.

But the contribution to growth from home buying saw the biggest fall in nearly seven years, dropping 6.8 percent.

“There’s no reason to worry about the economy accelerating into unsustainable growth, nor is there reason to worry about recession,” economist Chris Low of FTN Financial wrote in a note to clients.

President Donald Trump took office on a nationalist agenda, vowing to boost growth to three percent or higher by slashing taxes and regulation, funding a major infrastructure drive and revamped trade policies.

Trump hailed the second-quarter numbers, saying they were a harbinger of White House efforts to revive the economy.

“GDP is up double from what it was in the first quarter,” he said during a visit to Brentwood, New York.

“We’re doing really well and we took off all those restrictions,” he added. “We’ve sort of liberated the world of creating jobs.”

But Trump’s legislative agenda has remained backed up behind failed Republican efforts to repeal the prior administration’s signature health care laws.

“The result has thrown cold water on the hopes for a pro-growth agenda,” economist Diane Swonk said Friday in a research note.

“In fact, policy uncertainty, which places a drag on growth, is measurably on the rise.”

– Implications for the Fed –

Meanwhile, the Federal Reserve has raised interest rates twice so far this year, and forecast doing so once more before 2018, saying the tepid first quarter was merely a blip on the radar.

While the latest data confirmed this, they also contained fresh news that could undermine justifications for tightening again this year.

The so-called core measure of the personal consumption expenditures price index, an inflation measure the Fed watches closely, grew only 0.9 percent the second quarter, its lowest reading since 2010.

And in a separate report released Friday, the Labor Department said wages and salaries slowed in the second quarter, adding 0.5 percent, after a 0.8 percent gain in the first three months of the year.

Although analysts expect the continued expansion to drive down the unemployment rate further, from the already very low 4.4 percent, they have been puzzled by the absence of wage growth and inflation, and have cast doubt the Fed’s decision making.

“The quarterly pace of tightening since December may be too much too soon, resulting in falling inflation,” Low said Friday.

“This report represents one more reason to think the Fed may not raise rates in the second half at all.”