Inventory liquidation weighs on U.S. second-quarter GDP growth

By Lucia Mutikani WASHINGTON (Reuters) - The U.S. economy grew far less than expected in the second quarter as inventory investment fell for the first time in nearly five years, but a surge in consumer spending pointed to underlying strength. Gross domestic product increased at a 1.2 percent annual rate after rising by a downwardly revised 0.8 percent pace in the first quarter, the Commerce Department said on Friday. "Once the impact of a downward inventory adjustment is considered, the underlying pace of growth looks healthier than the headline number," said Chris Williamson, chief economist at IHS Markit in London. The economy was previously reported to have expanded at a 1.1 percent pace in the first quarter. Economists had forecast GDP growth rising at a 2.6 percent rate in the last quarter. While the inventory drawdown weighed on GDP growth, that is likely to provide a boost to output for the rest of the year. Excluding inventories, the economy grew at a 2.4 percent rate. A measure of domestic demand grew at a 2.7 percent pace. The Federal Reserve said on Wednesday that near-term risks to the economic outlook had "diminished." With the second-quarter GDP report, the government also published revisions to data going back to 2013 through the first quarter of 2016. The revisions partially addressed measurement issues, which have tended to lower first-quarter GDP estimates. GDP growth in the first quarter of 2015 was revised sharply higher to a 2.0 percent rate from the previously reported 0.6 percent pace. Prices for longer-dated U.S. government bonds pared losses after the data, while the dollar fell against a basket of currencies. U.S. stock futures extended losses. ROBUST CONSUMER SPENDING Consumer spending, which makes up more than two-thirds of U.S. economic activity, increased at a 4.2 percent rate - the fastest since the fourth quarter of 2014 and accounting for the rise in GDP growth in the second quarter. Although that rate of growth is probably unsustainable, a tightening labour market, rising house prices and higher savings should underpin spending for the rest of 2016. In the second quarter, income at the disposal of households after adjusting for inflation increased to a $13.92 billion (£10.5 billion) rate from a $13.81 billion pace early in the year. A separate report from the Labor Department on Friday showed labour costs increasing at a steady 0.6 percent rate in the second quarter, matching the prior quarter's rise. Inventory accumulation by businesses fell at a $8.1 billion rate in the second quarter, the first drop since the third quarter of 2011, down from a $40.7 billion increase in the first quarter. As a result, inventory investment subtracted 1.16 percentage points from GDP growth in the last quarter, the largest drag in more than two years. It was the fifth straight quarter that inventories weighed on output. Despite the lingering effects of the dollar's rally and weak global demand, exports rose in the second quarter, helping to narrow the trade deficit. Trade added 0.23 percentage point to GDP growth. Business spending on equipment contracted for a third consecutive quarter, the longest stretch since the 2007-2009 recession, though the pace of decline slowed. Business spending on equipment fell at a 3.5 percent rate after declining at a 9.5 percent pace in the first quarter. Business spending has been hurt by lower oil prices, which have squeezed profits in the energy sector, forcing companies to cut capital spending budgets. Economists say uncertainty over global demand and the upcoming U.S. presidential election are also making companies cautious about spending. Investment in nonresidential structures declined at a 7.9 percent pace. There were also decreases in investment in residential construction and spending by the government. (Reporting by Lucia Mutikani; Editing by Andrea Ricci)