The U.S. economy slowed in the spring, and most analysts expect it to weaken further in the months ahead. Yet the main driver of growth — consumer spending — remains vigorous enough to keep the economy growing steadily if still modestly.
Spending by households, which accounts for about 70% of economic growth, accelerated in the April-June quarter to its fastest pace in nearly five years. Eventually, President Donald Trump’s tariffs on hundreds of billions of dollars in imports could bring higher prices and lower consumer spending. But for now, household spending remains a vital pillar of the economy.
The nation’s gross domestic product — the broadest gauge of economic health — grew at a moderate 2% annual rate in the April-June quarter, the Commerce Department reported Thursday. That was down from a 3.1% growth rate in the first quarter, but it would have been much weaker without a burst of consumer demand.
Economists generally expect growth to slow to a 2% annual rate or less for the rest of the year. But most think consumer spending will be enough to offset headwinds ranging from a slowing global economy to growing uncertainties caused by Trump’s trade war with China.
In the April-June period, consumer spending shot up to an annual rate of 4.7%, the best showing since the final quarter of 2014. The surge followed two weak quarters for spending as car sales sank and households grew cautious after a stock market fall and a partial shutdown of the government.
At the same time, business investment is weakening in the face of the uncertainties created by the taxes that Trump has imposed on numerous imports — goods that many American businesses rely upon.
Gus Faucher, chief economist at PNC Financial, said he expects the trade war to begin to weigh on consumers in the second half of this year as some of Trump’s additional tariffs on Chinese products take effect Sunday and others on Dec. 15. In addition, higher tariffs on a separate group of Chinese products are to take effect Oct. 1.
Faucher said thinks growth is slowing to a 1.5% annual rate in the current July-September quarter and will dip to around a sluggish 1.3% rate in the fourth quarter.
“On the plus side, consumers remain in good shape … with solid job growth and good wage gains,” Faucher said. “But the higher tariffs are going to cause consumers to pull back for a time, especially on big-ticket items like cars and appliances.”
But by mid-2020, Faucher said, he expects spending to start accelerating as consumers become used to the higher tariffs. He said he thinks the strength from such spending will help avoid a recession.
The latest earnings reports from retailers show that some stores are faring better than others. Discounters are doing well, with Dollar Tree, Dollar General and Five Below all reporting solid sales figures in the most recent quarter.
And although Best Buy managed to post an increase in a key sales figure, it was overshadowed by disappointing revenue and by concerns about Trump’s taxes on Chinese imports. The electronics retailer lowered its revenue outlook for the year, citing the expected impact of tariffs.
Best Buy said it expects TVs, smartwatches and headphones to be affected by tariffs that take effect Sept. 1. Computers, smartphones and video game consoles would come next on Dec. 15.
CEO Corie Barry said she was unsure if Best Buy will raise prices yet, saying it’s difficult to predict how customers would respond.
Trump, who is counting on a strong economy to support his re-election bid, has a decidedly upbeat view of the economy. In a tweet Thursday, Trump asserted that “the economy is doing GREAT, with tremendous upside potential! If the Fed would do what they should, we are a Rocket upward!”
The president, who last week called Federal Reserve Chairman Jerome Powell an “enemy,” has been demanding that the Fed cut rates by a full percentage point — a proposal that most economists regard as wildly excessive. The Fed did cut rates by a quarter-point last month, the first rate reduction in a decade, and is expected to do so again at least twice more this year.
Some analysts say they think the expectation of further rate cuts makes them believe that the economy won’t be pushed into a recession by the trade war.
The 2% annual GDP growth in the April-June quarter represented a slight downward revision from the government’s first estimate of a 2.1% growth rate. Trump has pledged to achieve annual growth at annual rates of 3% or better. But economists generally foresee GDP slowing sharply after hitting 2.9% last year.
For all of 2019, economists estimate that GDP will slow to around 2.2% and then drop to below 2% in 2020 as the economy faces headwinds from the global slowdown and the effects from the escalating trade war with China.
The biggest factor in the government’s downward revision for the April-June quarter was a smaller gain in spending by state and local governments and fewer export sales. American exports have been hurt by the retaliatory tariffs China and other countries have imposed on U.S. soybeans and other products.
Business investment spending turned negative in the second quarter, falling at a 0.6% annual rate, which many economists believe occurred because of the uncertainty among businesses resulting from Trump’s trade war.
Mark Zandi, chief economist at Moody’s Analytics, said he isn’t forecasting a recession in the next 18 months but said one can’t be ruled out in light of Trump’s trade war with China.
“If the president continues to ratchet up the rhetoric and his tariffs on China, it will continue to unnerve business people who are already being more cautious with their investment plans,” Zandi said. “The risks of going into a recession are high if the president keeps escalating his trade war.”