Strong Consumer Spending, Weak Business Investment
Consumer strength has been offsetting weak business investment, but this weakness could be laying the foundation for a surprise uptick in economic growth in the second half of 2016, according to the August edition of Business Conditions Monthly, out today from the American Institute for Economic Research.
The sharp drops in business investment in the mining sector may have bottomed out, and slowing declines would bolster GDP growth, according to the report. And the sharp drop in inventories that hurt second-quarter growth is likely unsustainable, which would lead to stronger GDP growth.
Consumer spending, bolstered by continued job gains, exceeded 4 percent for the quarter, a strong showing. Although consumer fundamentals remain solid, consumer spending is unlikely to continue growing at such an impressive pace, according to the report. Business investment, meanwhile, fell 2.2 percent during the second quarter, the third quarterly decline in a row. The mining and energy sectors were big contributors to those declines.
The leading indicators in our Business Conditions Cycle model fell for the second month in a row, dropping to 42 percent in July from 46 in June and 50 in May. Our leading indicators have been in the 38-50 range for six months now, which can be interpreted as consistent with a slow-growth economy.
“The U.S. is likely on a sustainable, moderate growth path. However, the outlook remains fragile and the risk of recession remains slightly elevated,” according to the report.
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