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U.S. economy grew at weak 1.2 percent annual rate in second quarter

In this Thursday, May 19, 2016, photo, passers-by walk near the construction site a high-rise building in Boston. On Friday, July 29, 2016, the Commerce Department issued the first estimate of how the U.S. economy performed in the April-June quarter. (Steven Senne / Associated Press)
By Jim Puzzanghera Los Angeles Times

The weak start to 2016 continued through the spring, with the U.S. economy growing at a surprisingly weak 1.2 percent annual rate in the second quarter, the Commerce Department said Friday.

The first of three estimates for the April-June period was less than half of what economists had forecast and could cause Federal Reserve policymakers to hold off on another interest rate hike until at least December.

A second-straight quarter of anemic growth also could affect the presidential race, reinforcing Republican nominee Donald Trump’s criticism of the Democrats’ handling of the economy.

The Commerce Department also revised down first-quarter growth to just a 0.8 percent annual rate – the worst in two years – from an estimate last month of 1.1 percent.

Experts had expected the U.S. economy to bounce back strongly in the second quarter after an anemic expansion over the winter caused in part by financial market turmoil.

But the economy continued to struggle to gain traction.

Although consumers boosted their spending significantly in the second quarter – a 4.2 percent increase compared with 1.6 percent in the first quarter – business and government investment fell off.

Business investment declined by 9.7 percent in the second quarter, much worse than the 3.3 percent drop off in the previous quarter. A key component was investment in housing, which tumbled 6.1 percent after a 7.8 percent gain in the first quarter.

Government investment declined 0.9 percent in the second quarter after a 1.6 percent increase the previous quarter. The biggest drop-offs were in federal defense spending and investments by state and local governments.

Fed policymakers this week had opened the door to an increase in the central bank’s benchmark short-term interest rate as early as September after an upbeat assessment of the economy.

In a policy statement after their two-day meeting, Fed officials said the economy appeared to be “expanding at a moderate rate” and indicated that concerns had eased about a slowing labor market and fallout from the British vote to leave the European Union.

Job growth had rebounded strongly in June to 287,000 after the economy added just 11,000 net new positions in May.

Now economists will be watching next Friday’s jobs report closely to see if the labor market retained its strength in July.

Economists expect that the nation added a solid 175,000 net new jobs last month. The unemployment rate is forecast to tick down to 4.8 percent.