Economy grew 1.2 percent in second quarter as inventories fall

Last Updated Jul 29, 2016 9:45 AM EDT

The U.S. economy grew at a less-than-expected pace in the second quarter, amid a scale back in inventories as corporate America took a cautious stance in the face of iffy global demand.

Gross domestic product expanded at a 1.2 percent annualized rate following a 0.8 percent expansion in the first quarter, the Commerce Department estimated on Friday.

Economists had forecast GDP growth of 2.6 percent in the last quarter.

"GDP growth is clearly not going to reach 2 percent this year," offered Brian Coulton, chief economist at Fitch Ratings.

The disappointing figures also make an interest-rate hike by the Federal Reserve less likely in September, according to Paul Ashworth, chief U.S. economist at Capital Economics, which revised its forecast for 2016 GDP growth to 1.5 percent from 2 percent.

Still, "there are some reasons for optimism in the second half of the year," Ashworth wrote in a research note. "The drag from shrinking mining-related investment will fade, residential investment will recover and net exports should benefit from the fading of the 2014/2015 dollar surge."

Inventories were cut by $8.1 billion in the second quarter, while household consumption, which accounts for 70 percent of U.S. economic activity, advanced at an annualized rate of 4.2 percent, according to the data.

Lower energy prices have weighed on the energy sector, prompting companies in that industry group to trim expenditures. Shaky views of global demand and unease over the November U.S. presidential election could also be contributing to wariness by companies.

Government spending also contracted in the second quarter, falling 0.9 percent.

The first decline in inventories in almost 5 years hit GDP expansion in the second quarter, but could support output for the remainder of 2016.

"Growth was weaker than expected, although mainly because of a larger-than-expected drag from inventories, which is positive for future growth," wrote Jim O'Sullivan, chief U.S. economist at High Frequency Economics in a client note.