The U.S. economy rebounded strongly between April and June, government data showed Friday morning, as businesses invested more and consumers shelled out for furniture, washing machines and other goods.
The country’s gross domestic product, a broad measure of economic activity, grew at an annualized pace of 2.6 percent in the second quarter of 2017, the Commerce Department said. Yet measures of inflation remained weak, casting more doubt on the Federal Reserve's plan to continue steadily raising interest rates.
Economists had expected growth to rebound from a weaker reading in the first quarter, which is typically lower due to seasonal problems with measurement. GDP grew at an annual rate of 1.2 percent in the first quarter, compared with 1.8 percent growth in the fourth quarter of 2016.
Less spending by state and local governments, as well as lower investment in housing and company inventories, dragged on growth in the second quarter. But those effects were offset by an increase in other types of investment, greater consumer spending and stronger exports.
Growth was buoyed by investment from sectors like information technology and oil and gas, which is finally reinvesting in new infrastructure as global oil prices recover from previous lows, said Charles Seville, senior director at Fitch Ratings.
“Investment, which has disappointed over the past couple years, is coming back, and that’s an encouraging sign for the future,” said Seville.
While the 2.6 percent growth in the second quarter signals a rebound from the previous quarter, it still falls short of the 3 percent to 4 percent growth the Trump administration has been targeting. Many of President Trump's economic plans, including tax cuts and the administration's budget, rely on having higher economic growth to generate more revenue for the government. But while the current economic expansion is already the third-longest on record, rates of growth have remained stubbornly low, due to longer-run changes in the economy, such as the aging of the U.S. population.
Data also released Friday by the Commerce Department showed that full-year annual growth fell from a peak of 2.9 percent in 2015 to just 1.5 percent in 2016, the slowest pace since the recession.
“We continue to be range-bound with growth that is pretty modest compared with history. Some quarters, such as this one, were a little above it, some are a little below it, but really if you look at the years in total, they’re not moving much from this 2 percent growth on average,” said David Berson, chief economist at Nationwide.
The report also showed that inflation measures remain low, which could complicate the Federal Reserve's plan to continue gradually raising interest rates, said James Marple, senior economist at TD Economics.
The Fed's favored measure of inflation — a personal consumption expenditures price index that excludes volatile price changes in food and energy — grew just 0.9 percent in the first quarter, below the Fed's target rate. The central bank hiked rates by a quarter-point in June, the third such increase in six months, and is widely expected to be considering another rate hike in December.
“Despite all this consistent economic improvement and consistent job growth, inflation is continuing to run under target,” said Marple. “They may want to say: Let’s try to get inflation back up to target before we tighten too quickly.”
Other measures of the economy remain strong, which should push up inflation over time. Employers are adding jobs at a steady pace, and the unemployment rate fell to a 16-year low in May, before ticking up in June.
Companies such as Boeing, Facebook and Shell reported strong quarterly earnings this week. The S&P 500 and the tech-heavy Nasdaq Composite opened slightly lower Friday, after reaching fresh highs earlier in the week.
On Monday, the International Monetary Fund lowered its estimate of how fast the U.S. economy would grow in coming years, saying that it looked less likely that U.S. policy would stimulate the economy than the IMF projected in April. Pledges by the Trump administration to cut taxes and boost infrastructure spending have been pushed back due to conflicts in Congress and the White House.
Yet the IMF said that its forecast for global growth remained unchanged, given strengthening economies in France, Germany, Italy, Spain, Japan and Canada. That stronger global environment, combined with recent weakness in the U.S. dollar, is likely to help boost American exports in coming months.
Friday's GDP data is the first of three measurements the Commerce Department will take of the economy in the second quarter. GDP is often revised significantly as the agency collects more data.