WASHINGTON: The US 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 per cent annual rate after rising by a downwardly revised 0.8pc 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 1.1pc pace in the first quarter. Economists had forecast GDP growth rising at a 2.6pc 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 2.4pc rate. A measure of domestic demand grew at a 2.7pc 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 2.0pc rate from the previously reported 0.6pc pace.

Prices for longer-dated US government bonds pared losses after the data, while the dollar fell against a basket of currencies. US stock futures extended losses.

Consumer spending increased at a 4.2pc rate – the fastest since the fourth quarter of 2014 and accounting for the rise in GDP growth in the second quarter.

Published in Dawn, July 30th, 2016