The US GDP grew only 1.2% in the second quarter of 2016, well below expectations, as cautious business investment offset robust consumer spending. While consumer spending remained strong, declining business investment, reduced government spending, and businesses paring back inventories slowed overall growth. The sluggish growth raises concerns about the durability of the economic expansion and could spill into the presidential election campaign.

1. U.S. GDP Grew a Disappointing 1.2% in
Second Quarter
Economic growth was well below expectations; cautious
business investment offset robust consumer spending
By
Eric Morath and
Jeffrey Sparshott
Updated July 29, 20166:23p.m. ET
1060 COMMENTS
WASHINGTON—Decliningbusinessinvestment ishobblingan already sluggish U.S. expansion, raising concernsabout the economy’s
durability asthe presidential campaignheadsinto itsfinal stretch.
Gross domestic product, the broadest measure of goodsand servicesproduced acrossthe U.S., grew at a seasonally and inflation adjusted
annual rate of just 1.2% in thesecond quarter, theCommerce Department said Friday, well below the pace economistsexpected.
Economic growth isnow tracking at a 1% rate in 2016—the weakest start to a year since 2011—when combined witha downwardly revised
reading for the first quarter. Thatmakesfor an annual average rate of 2.1% growthsince the end of the recession, the weakest pace of any
expansion since at least 1949.
The output figuresare in some waysdiscordant with other gaugesof the economy. The unemploymentrate standsat 4.9% after a streak of
strong job gains, wageshave begunto pickup, and home saleshit a post-recession high last month.
Consumer spending also remainsstrong. Personal consumption, whichaccountsfor more than two-thirdsof economic output, expandedat a
4.2% rate in the second quarter, the best gainsince late2014.
On the downside, the third straightquarter of reduced businessinvestment, a largeparingbackof inventoriesand declining government
spending cut into those gains.
“Consumer spending growth wasthe sole elementof good news” in the latest GDP figures, said Gregory Daco, an economist at Oxford
Economics. “Weakness in business investment isan important andlingering growth constraint.”
Mr. Daco and other economistsexpect growth to acceleratein thethird quarter, but theweakfirst half means2016 islikely to comein below
an already disappointingtrend. In another worrisome sign, S&P 500 companiesare expected to report what is likely to be the fourth straight
quarter of decliningprofits, down 3.7% from second-quarter 2015, according to a Thomson Reuterssurvey of analysts’ forecasts. Revenues
are expected to decline1.2%.

2. At the same time, JPMorganChase JPM -0.45 % lowered itsprojectedriskof a recession over the next 12 monthsto 30% on Friday, from
an expansion highof 37% in early July, shortly after the U.K.’svote to leave the European Union, pointing to upwardly revised corporate
profit data included inthe GDP report.
Lackluster growth could spill into a presidential campaignthat isrevolving around starkly differentportrayalsof the U.S. economy and the
well-being of averageworkers.
Friday’s figurescould also raise new concernsto Federal Reserve officialswho said thisweeknear-term risks had diminished, signaling they
might move to raise interest rateslater thisyear, and possibly asearly as September.
Federal Reserve Bankof DallasPresident Robert Kaplan said Friday that the Fed hasto be cautiousabout raising ratesat a t ime when
growth is still sluggish.

3. “We now need structural reformsand other fiscal policy,” Mr. Kaplansaid. “Thenwe will have moreoperating room where we ca n normalize
rates.”
In contrast, San Francisco Fed President John Williamssaid Friday underlyingfiguresin the GDP report were en couraging. “We’ll be raising
rates, not lowering them, over the next several years,” he said. He didn’t offer specific timing.
A paring of inventorieswasa major driver of weakoutput figures, subtracting1.16percentagepointsfrom overall growth.Th at could suggest
businesses aren’t optimistic about future demand. But the category isvolatile, and rebuildingof stockpilescould support fu ture growth.
High inventoriesand soft export demand are weighingon United Parcel Service Inc. UPS -0.19 % ’s business-to-business shipments, the
company told investorsFriday. Thatstandsin contrast to a healthy U.S. consumer market lifting itse -commerce business.
“Inventoriesare lingeringlonger than we thought,” Chief ExecutiveDavidAbney said Friday. “Thestrength of the U.S. dollar isnot really
helpingus.”
Companiesalso spent lesson buildingsand equipment thisspring. Nonresidential fixed investment,a measure of businessspe nding,
declinedat a 2.2% pace.
That’sa concern because capital expendituresare an important ingredient inimprovingemployee productivity, whichhasgrown at an
anemic pace inrecent years, but iscritical to workers’ wagesand corporate profits.
Manufacturersespecially havebeenchallengedby a strong dollar, which booststhe price of U.S.-made goodsoverseas. The energy
industry has also been constrained,with relatively low oil andnatural gaspricescurtailing investmentsin mining andwells.
In some cases businesses may be substituting labor for capital, given depressed wage growth around the globe.
“Instead of buying an expensive piece of machinery, businessesare hiring really cheap workersthey can fire whenever they wa nt,” said
Megan Greene, chiefeconomist at Manulife Asset Management.
She noted that companiesare also increasing dividendsand buying backstock rather than investingin capital.
The presidential electionison the mindsof some firms.
Salesat Pennsylvania-based restaurant chain Saladworksare up almost 10% from a year earlier, but Chief Executive PatrickSugrue said
some of his best performingfranchiseesare reluctant to open new storesuntil after November.
“The election cycleputseveryone on hold,” he said. “They’re excited to open new stores, but they want to get a better peekunder the tentat
what’s going on.”
If the nine-monthlong slowdownin output growthextendsfurther, the U.S. couldjoin Europe andJapanaseconomiesstruggling to achieve
anything morethan themost modest growth. On an annualized basis, second-quarter growth inthe eurozone wasalso 1.2%, a slowdown
from 2.2% the prior period,Eurostat said Friday.
The latest U.S. figuresdon’t capture much, ifany, effectfrom the U.K.’sBrexit decision because the vote tookplace duringthe final daysof
the quarter, which endedJune 30.But uncertainty inEuropecouldadd to caution amongcompaniesaround the world.
“Looking beyond 2016, we continue to see macroeconomic uncertainty and pressures,” United TechnologiesCorp. UTX -0.79 % Chief
Financial Officer Akhil Johri toldinvestorsthisweek. He noted Brexit anda strong U.S. dollar asconcernsfor the Connecticut-based
conglomerate.
—Laura Stevensin Atlanta contributedto thisarticle.