WASHINGTON: US business investment contracted more sharply than previously estimated in the second quarter and corporate profit growth was tepid, casting a shadow on an economy that is being stalked by financial market fears of a recession.
The downturn in business spending has been blamed on the Trump administration’s nearly 15-month trade war with China. The soft investment and sluggish profit gains, reported by the Commerce Department on Thursday, could raise doubts on consumers’ ability to continue driving the economy.
A strong labour market is fuelling consumer spending, keeping economic growth on a moderate path. Federal Reserve Chair Jerome Powell last week said trade policy tensions, which “have waxed and waned, and elevated uncertainty is weighing on US investment and exports,” posing an ongoing risk to the longest economic expansion on record, now in its 11th year.
Powell said US central bank contacts had told policymakers that trade policy uncertainty “has discouraged them from investing in their businesses’’. The Fed cut interest rates again last Wednesday after lowering borrowing costs in July for the first time since 2008.
“Given the uncertainty in the economy, businesses are very cautious about spending in construction as well as equipment, and this is not a very good sign,” said Sung Won Sohn, a business economics professor at Loyola Marymount University in Los Angeles. “After all, businesses are the ones hiring people, providing income and the buying power for consumers’’.
Business investment declined at a 1.0 per cent annualized rate last quarter, the government said in its third reading of second quarter gross domestic product. That was the steepest decline since the fourth quarter of 2015.
Business investment was previously estimated to have dropped at a 0.6 per cent pace. It was pulled down by an 11.1 per cent rate of decline in spending on structures, which reflected decreases in the categories of commercial and healthcare, and mining exploration, shafts and wells.
After-tax profits without inventory valuation and capital consumption adjustment, which correspond to S&P 500 profits, increased at a downwardly revised $59.7 billion, or 3.3 per cent rate. Profits were previously reported to have advanced by $86.0 billion, or at a 4.8 per cent rate in the second quarter.
There were downward revisions to profits from the rest of the world and domestic industry profits.
Gross domestic product increased at an unrevised 2.0 per cent rate in the second quarter as the strongest consumer spending in 4-1/2 years offset weak exports and a slower pace of inventory investment. The economy grew at a 3.1 per cent rate in the January-March quarter. It expanded 2.6 per cent in the first half of the year.
But when measured from the income side, the US economy grew at a 1.8 per cent rate in the second quarter. Gross domestic income (GDI) was previously reported to have increased at a 2.1 per cent pace in the April-June quarter. It rose at a 3.2 per cent rate in the first quarter.
The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, rose at a 1.9 per cent rate last quarter, rather than the 2.1 per cent pace estimated last month. That was a slowdown from a 3.2 per cent pace of growth in the first three months of the year.
Inflation was a little bit firmer than previously thought in the second quarter. — Reuters