GDP Grows by 2.1% in Second Quarter Thanks to Consumer Spending

Julija A. Image
ByJulija A.
July 27, 2019
Gross domestic product increased by 2.1% in the second quarter of 2019, according to the US Bureau of Economic Analysis. This is significantly lower than the first quarter when GDP grew at 3.1%, but it exceeds economists’ expectations of 1.8% growth. 

Despite low net exports, lack of business investing, and inventory pullbacks, the economy is fairly steady thanks to one thing alone — personal consumption. Consumer spending grew by 4.3% in the second quarter of 2019, a jump from the feeble 0.9% growth of the year’s first quarter.

At the beginning of July, Federal Reserve Chair Jerome Powell identified consumer spending as one of the more “reliable drivers of growth in the economy.” Since consumer spending represents about 70% of the country’s economic activity, strong personal consumption expenditures are keeping things steady. Retail sales rose by 0.4% on a monthly basis in April, May, and June after declining at the beginning of the year. 

Despite better-than-expected second-quarter figures, GDP growth is decelerating. The Bureau of Economic Analysis report cites “reflected downturns in inventory investment, exports, and nonresidential fixed investment” as contributing factors. Add weak manufacturing numbers and trade tensions with China and Mexico, and experts are unsure how long the American consumer can keep propping up the economy. 

The second quarter of this year marks an important anniversary — one decade since the end of the Great Recession. Assuming the country isn’t on its way to recession right now, this marks the longest period of economic expansion in U.S. history. It is difficult to maintain steady growth indefinitely, and some economists are already predicting a period of severe economic decline in 2020. Europe is already close to a downturn, and America doesn’t appear to be close to making any trade deals with China in the short term. If the trade war experiences a flare-up, it could push America into a recession sooner than expected. 

On the other hand, President Trump made a budget deal with Congress this week, which means that the risk of another prolonged government shutdown has been significantly reduced. If the administration plays its cards right and manages to reach a trade deal with China by fall, it could give the economy a significant boost. 

This report is the last important piece of economic information before the Federal Reserve Board meeting on July 30-31. Despite the positive report, the Fed is unlikely to give up on interest rate cuts. Inflation, which is running below its target 2%, is still a concern, so the Fed will want to further stimulate the economy.

About author

Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.

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