U.S. consumers powered better-than-expected economic growth last quarter.
As shown in the LPL Chart of the Day, U.S. Consumers Boost Second Quarter Growth, gross domestic product (GDP) grew 2.1% last quarter, higher than consensus estimates for 1.8% growth. Consumer spending added 2.9% to GDP growth, while government spending contributed 0.9%.
The U.S. consumer provided a solid base for GDP, but other sectors of the economy withered. Output from trade and inventories dragged on GDP by 1.5%, almost offsetting their 1.7% boost to growth in the first quarter.
Recent data has hinted toward accelerating consumer activity. Month-over-month growth in control group retail sales (a core reading of retail sales) averaged 0.6% in the second quarter, one of the highest quarterly averages in this economic cycle. Consumers have also benefited from short-term tailwinds, including seasonality and lower gas prices.
Business spending was a slight drag on growth last quarter, a disappointing trend we’ve noticed in recent data. Year-over-year growth in capital expenditures (capex) has stalled this year as U.S. companies shelve expansion plans amid trade uncertainty. June capex data this week showed promising signs of life, as new orders for nondefense capital goods (excluding aircraft) jumped 1.9% month over month in June, the biggest gain in 16 months. Still, year-over-year growth in these new orders remains muted.
“We’re encouraged by strength in consumer spending, especially in the face of global headwinds,” said LPL Research Chief Investment Strategist John Lynch. “Still, we believe capital expenditures will need to rebound as the cycle matures to extend the expansion. A U.S.-China trade deal would be an important first step.”
We expect the economy to grow 2.25–2.5% this year, as we mentioned in our Midyear Outlook 2019. If that happens, growth this year will be around the average pace of growth in this expansion, which is slightly above 2%. Average growth is satisfactory at this point in this cycle, but the underlying details suggest the economy has yet to reach its full potential.