The Bureau of Economic Analysis (BEA) announced today that gross domestic product (GDP), the widest measure U.S. economic activity, grew at a 2.1 percent annualized rate in the second quarter of this year, down from the 3.1 percent rate of the first quarter.
Compared to the first six months of 2018, the economy in the first half of 2019 grew just 1.6 percent, a pronounced slowdown relative to the 3.9 percent growth between the first half of 2018 and the first half of 2017.
Some of this slowdown can be explained by a negative contribution from volatile inventory investment (which subtracted 0.9 percent off this quarter’s growth rate). But there is plenty to worry about in this report, as it showed pronounced weakness in both residential and nonresidential investment. Residential investment contracted at a 1.5 percent rate, and this sector has contracted for 18 months straight. The last contraction of housing construction that lasted this long began in the Great Recession. Nonresidential fixed investment (NRFI—or business investment), saw a large contraction as well, with investment in structures falling at a 10.6 percent rate. This represents the third time in four quarters this type of investment has contracted. Other components of NRFI— equipment and intellectual property products—also turned in weak performances relative to the last year’s trend. This weak investment performance coming a full 18 months after the effect of the Tax Cuts and Jobs Act (TCJA) should have been felt is a clear refutation of arguments that it would noticeably boost productive investment. Falling exports knocked 0.6 percent off of the quarter’s growth.
Today’s data provides more ammunition for those arguing that the Fed should cut interest rates at its next meeting. A growth slowdown is clearly happening, and, the parts of the economy one would have expected to be negatively impacted by previous rate hikes (investment and net exports) are showing clear signs of struggle. Most importantly, this quarter’s report represents the 39th time in 42 quarters since the beginning of 2009 where year-over-year core inflation has fallen short of the Fed’s long-term 2 percent target. Cutting rates next week would signal the Fed is getting truly serious about defending that target against disinflation.