US economy expected to pick up after weak growth in spring

By Martin Crutsinger

AP Economics Writer

WASHINGTON

A surprisingly lackluster economy last quarter served as a reminder of how choppy the pace of growth has been since the Great Recession ended seven years ago. Businesses pared their stockpiling and investment through the spring. But consumers – the heart of the U.S. economy – kept spending.

Most economists foresee faster, if still modest, growth the rest of this year.

The Commerce Department’s report Friday showed that gross domestic product – the broadest gauge of the economy – grew just 1.2 percent in the April-June quarter. That was far weaker than the forecasts of most analysts, who had expected growth of twice that pace in a bounce-back from a slump at the start of the year.

Earlier this week, a statement from the Federal Reserve had led many economists to conclude that a strengthening economy would lead the Fed to resume raising rates as soon as September. But after Friday’s tepid GDP report, many said a September rate hike was now probably off the table.

“The GDP data have significantly reduced the chances of a near-term rate hike,” said Paul Ashworth, chief economist at Capital Economics. Ashworth predicts only one interest rate increase this year, in December.

The biggest factor for the shortfall in GDP growth last quarter was that businesses reduced their restocking by the most since 2011. That pullback in stockpiling subtracted 1.2 percentage points from annualized growth in the April-June quarter – more than economists had expected. It was the fifth-straight quarter in which weak inventory building has dampened the economy’s growth.

But most analysts say the efforts by businesses to adjust their stockpiles to more closely match their sales is probably ending and will be followed by increased restocking, which would deliver a boost to GDP in coming quarters.

“Businesses have overdone the inventory reductions, and that is likely to reverse in the third quarter, which will help growth,” said Nariman Behravesh, chief economist at IHS Global Insight.

Behravesh predicted that GDP will accelerate to an annual growth rate of around 2.5 percent in the second half of the year. Even with that rebound, growth for the full year would amount to a sluggish 1.5 percent. It would be the slowest pace since the recession ended.