U.S. Economy Glides Back to Steady, Modest Growth Path -- Update

By Jeffrey Sparshott Features Dow Jones Newswires

The U.S. entered the ninth year of economic expansion in steady but unspectacular fashion that shows little sign of abating.

Continue Reading Below

Gross domestic product, a broad measure of goods and services produced in the U.S., expanded at a 2.6% annual rate in the second quarter, the Commerce Department said Friday, a rebound after a tepid start to the year.

The figures repeated a familiar pattern of weak winters followed by a stronger spring and summer, leaving overall growth subdued. "The economy is on cruise control. Unfortunately cruise control is about 2%," said Diane Swonk, founder of DS Economics.

The U.S. emerged from recession in mid-2009. Since then, GDP growth has averaged 2.1%. In contrast, growth averaged 3.6% during a 10-year span in the 1990s and 4.9% during a nearly nine-year stretch in the 1960s, the only two expansions with longer durations.

Slow and steady has produced a long stretch of job creation and left the economy on mostly stable footing, with few signs of the kind of excess that in the past have derailed long periods of growth.

In the 1960s, for example, runaway inflation led the Federal Reserve to raise interest rates and curtail growth. Today, broad measures of inflation are historically weak. The price index for personal-consumption expenditures -- the Fed's preferred inflation gauge -- rose at an annual rate of 0.3% in the second quarter. That is well below the Fed's 2% target. Core prices, which exclude volatile food and energy costs, increased 0.9% at an annual rate during the quarter.

Continue Reading Below

After the 1990s stock boom, a tech bubble burst, crashing markets and ultimately sending the economy into recession and an expansion that didn't produce many jobs. There are signs today that stocks are fully valued, one potential risk for investors. But the stock boom lacks the fervor of the 1990s, when outsize internet company valuations proved unsustainable.

Absent such forces, underlying economic growth appears locked in for the foreseeable future, with both households and businesses helping to propel modest growth. Forecasts for the remainder of the year are mixed. J.P. Morgan expects a second-half growth rate of 1.75%, NatWest Markets around 2.5% and Capital Economics 2.5% to 3.0%. The Federal Reserve in June estimated full-year GDP growth would register at 2.2%.

Forecasters in The Wall Street Journal's July survey of economists pegged the odds of a recession at just 15%, little changed from last month and down 22% from a year ago.

Against that backdrop, stocks and corporate profits are marching higher and volatility in markets is low. The Dow Jones Industrial Average is less than 200 points shy of the 22000 mark after rising 0.15% Friday 21830.31.

On Friday, the biggest U.S. energy companies reported robust profits. Exxon Mobil Corp. nearly doubled its net income compared with a year ago and Chevron Corp. saw profits jump to $1.45 billion in the second quarter. Earlier in the week, Caterpillar Inc., the world's largest heavy-machinery maker, delivered an upbeat earnings report amid growing demand in China's construction sector and a revitalization of the mining industry.

"The outlook is that businesses and consumers are becoming more confident in the future," Christopher Martin, chairman and CEO of Jersey City, N.J.-based Provident Financial Services, told investors Friday. "And notwithstanding the headlines from Washington and the partisanship in Congress, overall, we are bullish on the U.S. and our local economy and its potential for stronger growth."

Friday's GDP report showed that consumer spending rose at a 2.8% pace, an improvement from the first quarter's 1.9% rate. Consumers stepped up spending on both goods and services, though there are signs households do have some concerns about the future.

The University of Michigan on Friday said its final reading on overall consumer sentiment in July fell slightly from the prior month. An index that tracks expectations about the future declined to 80.5, its lowest level since last October. An index tracking confidence in the current economic situation jumped to 113.4, its highest level since July 2005 and the second-highest reading since November 2000.

Businesses also have been upbeat. A measure of corporate spending, nonresidential fixed investment, climbed at a 5.2% pace. While that was down from the previous quarter, it is still one of the best readings since 2014. Investment in equipment was even stronger; it grew at 8.2% pace.

Investment this year has been particularly strong in the energy sector. The number of oil and gas rigs in the U.S., a proxy for activity in the sector, is up by 44% to 958 since the start of the year, according to oil-field services company Baker Hughes.

Friday's GDP numbers showed that investment in mining exploration, shafts and wells more than doubled at an annual pace in the second quarter. Businesses also spent heavily on computers and industrial equipment in the second quarter, investments that could lift productivity and help further spur economic growth.

And in a sign of an improving global economy, U.S. exports expanded faster than imports. That made trade a small contributor to overall growth after a long stretch of negative effects on output from 2014 to 2016. A weaker dollar may also be contributing to the export sector's improvement.

Government outlays rose, led by a surge in federal military spending, while spending on home building and improvements was the biggest drag in the second quarter. Residential fixed investment dropped at a 6.8% pace, the sharpest decline since 2010.

President Donald Trump, who took office in January, has pledged to return the nation to the above-3% growth by overhauling the tax and regulatory systems and negotiating better trade deals. There is little to suggest a breakout is imminent.

"If a well-constructed tax reform deal is enacted this year or next, the economy may fire on all cylinders and accelerate to closer to President Trump's 3% goal," said Stephen Stanley, chief economist at Amherst Pierpont Securities. But, for now, the U.S. economy is firmly entrenched at a little better than 2%, he said.

Write to Jeffrey Sparshott at jeffrey.sparshott@wsj.com

(END) Dow Jones Newswires

July 28, 2017 17:13 ET (21:13 GMT)