U.S. Department of the Treasury

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WASHINGTON - Real GDP growth picked up in the second quarter of 2016 to an annual rate of 1.2 percent, as strong consumer spending was somewhat offset by continued inventory adjustment.  Favorable domestic fundamentals, including strong job creation and rising incomes, should support solid growth going forward.  Private-sector forecasters anticipate that the economy will grow at around a 2¼ percent pace over the remainder of the year.

Real GDP increased at an annual rate of 1.2 percent in the second quarter, up from a 0.8 percent pace in this year’s first quarter.  Consumer spending grew at a brisk 4.2 percent pace in the second quarter, with generally broad-based increases across spending categories.  Net exports added 0.2 percentage point to GDP growth in the second quarter, after being essentially neutral in the first quarter. 

Business investment remains a weak spot, with spending down at an annual rate of 2.2 percent in the second quarter, the third consecutive quarterly decline.  Equipment investment fell at a 3.5 percent pace, and spending on structures dropped at a 7.9 percent rate, in part reflecting further pullback in energy sector investment.  Meanwhile, investment in intellectual property products grew at a 3.5 percent pace, building on a similar increase in the first quarter.  Residential investment fell at a6.1 percent rate in the second quarter, but the drop comes after a year of double-digit growth.  Solid single-family and multi-family construction activity should help support economic growth in the latter half of this year.

After five consecutive quarters of positive contributions to real GDP growth, total government spending was a small drag in the second quarter, moving down at an annual rate of 0.9 percent.  State and local spending declined at a 1.3 percent pace, largely reflecting weaker spending on construction after a temporary boost in the first quarter.   Federal spending edged down at a 0.2 percent pace.  Government spending should be moderately supportive of growth for the remainder of the year.

Inventory stocks were liquidated in the second quarter, and the decline subtracted 1.2 percentage points from growth.  Excluding the inventory component, final sales of domestic product increased at a solid annual rate of 2.4 percent in the second quarter.

Since the beginning of 2016, job growth has averaged 172,000 per month, down from the 229,000 monthly pace experienced in 2015.  At 4.9 percent in June, the unemployment rate was less than half its 2009 peak of 10 percent.  Initial claims have remained below the 300,000 mark for 73 straight weeks, suggesting that layoffs are low and job security has improved. 

Other measures of labor market utilization have also improved.  The U-6 unemployment rate, which includes marginally attached workers and those working part-time for economic reasons, declined to 9.6 percent in June, an eight-year low.  The median duration of unemployment is near its lowest level since late 2008, and the long-term unemployment rate has declined to just slightly above its pre-recession average.  In addition, the labor force participation rate has shown some signs of stabilization as more workers have responded to improving labor market conditions by re-entering the labor force. 

Consumer price inflation remains moderate.  The Consumer Prices Index (CPI) for all items increased 1.0 percent over the year ending in June, following a 0.1 percent increase over the 12‑month period through June 2015.  The low rate of inflation partly reflects previous declines in energy prices and small increases in food prices.  Energy prices fell 9.4 percent over the year ending in June, with gasoline prices down 15.4 percent.  Food price inflation has edged up only 0.3 percent over the past 12 months, the slowest increase in more than six years and down from a 1.8 percent increase over the preceding year.  Excluding food and energy, the CPI was 2.3 percent higher this June than a year ago, up from a 1.8 percent rise a year earlier.  Private-sector forecasters expect headline CPI inflation of 1¼ percent during 2016, rising to 2¼ percent during 2017.

Nominal wage and compensation gains are picking up.  Hourly earnings for all employees rose 2.6 percent over the year ending in June 2016, up from a 2.0 percent increase over the year-earlier period.  The employment cost index for wages, salaries and benefits in private industry rose 2.4 percent over the year ending in June, up from 1.9 percent over the year-earlier period. 

Domestic demand is solid, job creation has remained strong, incomes are rising, and consumer sentiment is near pre-recession norms.  These favorable conditions should support a solid pace of GDP growth for the remainder of the year.  A consensus of private forecasters projects that the U.S. economy will grow at roughly a 2¼ percent rate over the latter half of 2016.