More Disappointing Economic News from the United States

Once again, the United States economy failed to meet expectations, this time by posting a disappointing preliminary GDP growth figure for the second quarter of this year.  While this latest disappointment stems from a preliminary GDP growth figure that may be revised upwards in the coming weeks (as in the first quarter), it nevertheless points to the fact that the US economy is struggling to gain momentum amid severe external pressures and internal uncertainty surrounding the political situation in the United States.  The fact that the US economy is not growing as fast as many expected it to by this point could have a significant impact on the political situation in the US later this year.  Moreover, the US economy’s struggles are bad news for a global economy desperately in need of a driver of growth.

According to the first estimation of GDP growth for the second quarter of this year, the United States economy expanded at a rate of just 1.2% on a year-on-year and an annualized basis.  If this figure holds, this will represent the lowest rate of year-on-year economic growth in the US since 2013.  Regardless, it is clear that the acceleration of economic growth in the US that had been expected last quarter did not materialize.  On the positive side, consumer spending in the United States was strong, as wages are now rising and consumer confidence remains relatively high.  However, this solid performance by the US consumer sector was offset by lower levels of business confidence in the US, which stems from both the uncertainty regarding the upcoming presidential election in the US and the rising risk levels in international markets.  Furthermore, government spending, particularly at the state and local level, was lower than expected last quarter.  As a result, the US is in the midst of its worst slump since 2013.

Looking ahead, many of the same factors that held back economic growth last quarter will remain in place over the near-term.  For example, business and investor confidence is likely to remain shaky until at least after the US presidential election in November, while the economic health of key international markets is expected to remain poor.  In fact, it is this dangerous external environment that is likely to prove to be the greatest threat to the US economy at least into 2017, if not longer.  Meanwhile, consumer spending in the United States is expected to continue to rise in the coming months and this should allow for the US economy to grow at a faster clip in the second half of this year.  In fact, the third quarter’s economic growth results will be released shortly before the November elections and they could play a role in deciding the outcome these elections.  In the meantime, hopes that the US economy could grow by at least 3% for the first time in more than a decade in 2016 have clearly been dashed and the growth rate for the US this year is unlikely to be more than 2.0% at best, continuing a decade-long run of sluggish growth for the world’s largest economy.

The fact that the world’s largest economy is failing to grow as fast as had been expected is very bad news for the global economy as a whole and the latest disappointment from the US economy comes at a time when business and investor confidence around the world is falling rapidly.  Moreover, the US’ struggles indicate that, for the fifth consecutive year, global economic growth will remain stuck at near 3%, a much lower level than before the global finance crisis.  This is due to the fact that the Chinese economy has clearly experienced a major slowdown, while developed economies in Europe and East Asia have struggled even more than the US in recent years.  Furthermore, many former high-growth emerging markets remain in a deep downturn, taking away what had been expected to be increasingly important drivers of growth for the global economy.  With so many key economies struggling to grow, the United States is economy is needed to boost global growth in the coming years, but the recent struggles suggest that this growth may prove elusive.  As such, the world is likely to experience an even longer period of 3% economic growth, something that is likely to have major social and political repercussions for years to come.