By Jeffry Bartash, MarketWatch
The numbers: The U.S. economy grew a touch slower in the spring than initially reported owing to declining exports and weak corporate investment, but companies still posted the biggest increase in profits in five years even as their business outlook dimmed.
Gross domestic product, the official scorecard for the economy, expanded at a 2% annual pace from April through June, the government said Thursday . The government initially estimated the U.S. rose at a 2.1% clip in the second quarter.
GDP slowed from a 3.1% gain in the first three months of the year.
What happened: Consumer spending was even stronger in the second quarter than it first looked.
The government upped its estimate to 4.7% from 4.4%, marking the biggest gain since the end of 2014. Americans spent more on new cars and trucks, clothes and eating out, among other things.
Higher consumer outlays helped businesses churn out the first increase in profits in three quarters and the biggest since the middle of 2014. Adjusted pretax corporate profits jumped 5.3%.
Businesses also appear to have shored up profits by reducing investment, which contributed to slightly weaker second-quarter growth. Fixed investment declined by a revised 1.1% vs. the earlier 0.8% estimate.
The level of inventories — unsold goods — also fell by a revised $47 billion instead of the originally reported $44.3 billion.
Exports fell an even sharper 5.8%. The ongoing trade fight with China, a slowing global economy and a strong dollar have combined to hurt U.S. exports. The increase in imports was unchanged at 0.1%.
State and local spending also grew a bit more slowly than initially reported.
Most other figures in the report were little changed. The government revises GDP twice after the original release to incorporate the latest data.
Big picture: As the second-quarter results showed, consumers are driving the economy forward while businesses hang near the sidelines waiting to see how the trade dispute with China plays out.
The situation remains the same nearly two-thirds of the way through the third quarter. Consumers have remained remarkably confident despite the trade war and big ups and downs in the stock market. Americans appear to be spending enough to keep the economy growing a solid 2% or so.
Businesses, for their part, have scaled back hiring and production plans. However, they are still selling enough goods and services to avoid mass layoffs and to keep the economy fairly stable.
The big question is, what do firms do if tariffs or other economic woes cut into profits again? Another measure tied to the S&P 500 index that tracks profits suggests they could fall again in the third quarter.
What they are saying? “If the consumer cracks now, with business outlays already soft, the economic expansion could be in trouble,” said Amherst Pierpont chief economist Stephen Stanley. “ However, so far, there are no signs that we are about to see a downward turn in employment or consumer spending.”
Market reaction: The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.07% and the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.48% rose in Thursday trades after China said it would not retaliate immediately to the latest U.S. increase in tariffs.
The 10-year Treasury yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.99% edged up to 1.51%.