U.S economy slowed in the spring, but remains healthy

The U.S. economy slowed in the spring but continues to grow at a healthy pace that shows little sign of a recession.

The economy expanded at a 2.1% annual rate from April through June, the U.S. Commerce Department said, a downgrade from the first quarter's surprisingly strong 3.1% pace.

President Donald Trump called it "not bad" growth in a tweet Friday morning and predicted the economy is "set to zoom" going forward, but many economists say the bounce is over from Trump's stimulus and the economy has returned to levels similar to the Obama era.

"Last year was a fiscal sugar rush. This year it's starting to fade," said Michael Feroli, chief U.S. economist at J.P. Morgan.

Consumer spending and federal government spending accounted for the bulk of U.S. growth as Americans bought heavily again in the spring and federal spending surged after the partial shutdown in the first quarter. Business spending dried up, however, turning negative for the first time since early 2016. Many executives blame uncertainty around Trump's trade war for their hesitancy to spend as much as they did a year ago.

Trump has promised his policies will achieve above 3% growth for years to come. Last year, he nearly achieved that goal with an official growth rate of 2.9%, but new data released by the Commerce Department Friday shows that growth peaked in the middle of 2018 and momentum cooled heading into this year.

Trump has boosted the economy with an unprecedented amount of stimulus at a time when unemployment is very low, but some point out the result is an economy that is on track to have similar growth to the end of the Obama era. Growth was 2.5% in 2014 and 2.9% in 2015.

"We spent a lot and didn't get a lot of growth out of it," said Gregory Daco, chief U.S. economist at Oxford Economics. "We got a one-time boost to growth to about 3%, but it wasn't sustainable. It didn't increase business investment for the long-term."

Trump beefed up military and domestic spending, scaled back regulations and enacted the largest corporate tax cut in the country's history.

The tax cut for businesses was supposed to spur companies to invest in new properties, equipment and products, but after a bounce early last year, businesses have pulled back on spending. Nonresidential fixed investment fell sharply to -0.6% during the quarter, and spending on new structures plummeted to -10.6%.

The White House argues that Trump's policies have enabled millions more Americans to get jobs and receive higher pay through tax cuts and a strong labor market that has forced companies to boost wages. That, in turn, has helped raise consumer spending, said Larry Kudlow, Trump's chief economic adviser.

Kudlow called consumers "heroes" on Friday and blamed the slowing economy momentum on the Federal Reserve, which raised interest rates four times last year and has been a nearly constant target of Trump's ire.

"We had to suffer through severe monetary tightening," Kudlow said on CNBC. But he predicted a strong second half of the year. "We are the hottest economy in the world and I expect us to stay that way."

Kudlow's remarks echoed Trump's tweet that growth was "not bad considering we had the very heavy weight of the Federal Reserve anchor wrapped around our neck."

The Fed is almost certain to lower interest rates at the conclusion of its meeting next week, but the central bank has been hinting that the cut is coming since early June, which many say is a key reason that stocks hit record highs again and business sentiment has rebounded somewhat.

"In many ways, we've already reaped the benefits of a Fed cut," said Diane Swonk, chief economist at Grant Thornton. She pointed to higher stock prices, more mortgage refinancing and a rebound in spending as evidence the Fed's more "dovish" stance has had an impact.

Few are predicting a recession anytime soon. The nation is in the midst of the longest expansion in U.S. history, growing for more than a decade and exceeding even the 1990s boom.

While some have questioned how much longer the expansion can last, it is showing little sign of weakness so far. Most experts say it will take a major event of some sort to knock the economy off course.

"Expansions don't die of old age. I like to say they get murdered," said Ben Bernanke, an economist and former Federal Reserve chair, earlier this year.

The bearish case is that businesses are pulling back on spending and if that spills over to a pullback in hiring, that could spook consumers and cause them to close up their wallets. But many forecasters don't believe that scenario is likely to unfold in the next year.

If the economy continues to grow around 2%, that should be enough to justify adding more jobs and increasing pay for many workers, which fuels consumer spending.

"I don't see any warning signs right now," said Ben Herzon, executive director of U.S. economics at Marcoeconomics Advisers. "It's hard to be against the economy when the consumer is in such good shape."

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