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Weak U.S. business investment, tepid profits cast shadow on economy

Weak U.S. business investment, tepid profits cast shadow on economy
FILE PHOTO: The engine and drive train are pictured with the body on the assembly line at the General Motors (GM) manufacturing plant in Spring Hill, Tennessee, U.S., August 22, 2019. REUTERS/Harrison McClary/File Photo -
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Harrison McClary(Reuters)
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By Lucia Mutikani

WASHINGTON (Reuters) – U.S. 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.

Weak business spending, which has been blamed on the Trump administration’s nearly 15-month trade war with China, and tepid profit gains could raise doubts on consumers’ ability to continue driving the economy. Consumer spending is being fueled by a strong labor market.

The trade war is threatening the longest economic expansion on record, now in its 11th year. Federal Reserve Chair Jerome Powell said last week policymakers “expect the economy to continue to expand at a moderate rate,” but reiterated that “weakness in global growth and trade policy uncertainty have weighed on the economy and pose ongoing risks.”

The U.S. central bank cut interest rates again last Wednesday after lowering borrowing costs in July for the first time since 2008.

Business investment declined at a 1.0% annualized rate last quarter, the government said in its third reading of second-quarter gross domestic product on Thursday. That was the steepest decline since the fourth quarter of 2015.

Business investment was previously estimated to have declined at a 0.6% pace. It was pulled down by an 11.1% pace of drop 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% rate. Profits were previously reported to have advanced by $86.0 billion, or at a 4.8% 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% rate in the first 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% rate in the January-March quarter. It expanded 2.6% in the first half of the year.

But when measured from the income side, the U.S. economy grew at a 1.8% rate in the second quarter. Gross domestic income (GDI) was previously reported to have increased at a 2.1% pace in the April-June quarter. It rose at a 3.2% 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% rate last quarter, rather than the 2.1% pace estimated last month. That was a slowdown from a 3.2% pace of growth in the first three months of the year.

U.S. financial markets were little moved by the data.

LOSINGALTITUDE

The economy is largely losing speed as the stimulus from the White House’s $1.5 trillion tax-cut package and a government spending blitz fades. Economists are forecasting growth this year around 2.5%, below the Trump administration’s 3% target.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged at a 4.6% rate in the second quarter. That was the fastest since the fourth quarter of 2014 and was a slight downward revision from the 4.7% pace estimated last month.

Consumer spending is being driven by the lowest unemployment rate in nearly 50 years. A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits increased 3,000 to a seasonally adjusted 213,000 for the week ended Sept. 21.

Despite the strong labor market conditions, there are fears that a recent ebb in consumer confidence amid concerns about duties on Chinese consumer goods, which came into effect in September, could slow spending. Further tariffs are expected.

The trade deficit widened to $980.7 billion in the second quarter instead of $982.5 billion as reported last month. Trade cut 0.68 percentage point from GDP growth last quarter rather than 0.72 percentage point as previously reported.

Trade could remain a drag on GDP growth in the third quarter, with a third report from the Commerce Department on Thursday showing the goods trade deficit rose 0.5% to $72.8 billion in August amid a rise in imports.

Growth in inventories was revised slightly up to a $69.4 billion rate in the second quarter from the previously estimated $69.0 billion pace. Inventories sliced off 0.91 percentage point from GDP growth last quarter as reported in August. The slowdown in inventory accumulation reflects robust consumer spending.

Government investment was raised as state and local government spending was much strong than initially thought. Spending on homebuilding contracted for a sixth straight quarter, the longest such stretch since the Great Recession.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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