WASHINGTON -- The latest government figures showing that U.S. output grew 3.8% in the second quarter provided little new information about the economy's direction, analysts said Friday.
The Commerce Department's revised estimate for gross domestic product was nearly identical to last month's preliminary estimate of a 3.7% rise in GDP, with much of the growth coming from a bulge in business inventories while consumers cut back on spending.
Final sales, a measure of demand that excludes change in inventories, rose only 1.4%. That, too, was little changed from last month's reported increase of 1.5%
"This just reinforced our view that it was an inventory story and that the components that were sluggish remained sluggish," said Astrid Adolfson, a financial economist for MCM Money Watch.
However, the bond market rallied in reaction to the report, pushing the yield on the Treasury 30-year bond back down toward 7.50%.
Most analysts had been looking for an Upward swing in consumer spending to push total GDP growth over 4%, which would suggest that the economy had some extra momentum going into the second half of the year. Instead, the Commerce Department said that personal spending rose only 1.4%, not much of a difference compared with the 1.2% rise originally reported.
Moreover, inflation measures remained tame and unchanged. Both the implicit price deflator and the GDP fixed-weight price index were up 2.9%, helping to keep bond market sentiment positive.
Economists have been debating for weeks whether the surge in inventories during the second quarter was a voluntary move by businesses to stock up in anticipation of increasing consumer demand or involuntary, in which case manufacturers will at some point be forced to curtail output.
The issue goes to the heart of expectations for economic growth in the second half of the year. If output slows to around 2.5%, which some economists believe will happen, the Federal Reserve will presumably be under less pressure to tighten credit again.
Raymond Worsek, chief economist for A.G. Edwards & Sons Inc. in St. Louis, said there was evidence that the buildup in inventories was involuntary. He noted that manufacturers and wholesalers carded lower inventories in the second quarter than previously reported, while retail inventories jumped to $23.3 billion from $15.7 billion.
But other analysts stressed that it is too early to tell what will happen with inventories. Edward McKelvey, senior economist for Goldman, Sachs & Co., said it is unclear how much of the rise in inventories was imported goods instead of goods made by U.S. plants, nor is it clear what will happen to consumer demand. It can also be argued that inventory levels remain low by historical standards, he said.
Worsek said he believes that high-income consumers cut back on their purchases in the spring as they took a hit from tax reform. It is also possible that the rise in interest rates put a chill on buyers with adjustable-rate mortgages and credit debt, he suggested.
Still, Worsek said he expects Fed officials to tighten credit again in response to a small pick-up in inflation. Many analysts believe the Fed will take another look at rising interest rates at the Nov. 15 meeting of the Federal Open Market Committee.
Some economists expect U.S. output to rebound in the fourth quarter after taking a breather. Adolfson said MCM Money Watch is looking for GDP to swell 4% in the last three months with the help of a resumption in auto production, stronger exports, and solid capital spending.
Others think the economy will cool as the year unfolds, erasing fears about inflation and further rate hikes by the Fed. "We're exceedingly optimistic about the bond market," McKelvey said. "You should not expect yields to ease immediately, but the market has a much sturdier growth and inflation outlook built into it than we think is justifiable."
Analysts at Merrill Lynch & Co. said they believe that although growth will rebound later in the year, third-quarter GDP will turn out to be less than 2%. "The Fed will eventually tighten policy another notch, but the move may be more distant than many currently expect," the firm said in its latest economic commentary.
