Despite all of the chatter about a slower economic growth ahead, the American consumer recorded very strong spending in the second quarter of 2019.

In fact, real GDP growth as reflected in the Advance estimate came is at a seasonally adjusted annual rate of 2.1% in Q2, unusually strong considering that the growth rate was 3.1% in the first quarter.

All in all, real GDP annual growth averaged 2.6% in the first half of 2019, well above the Congressional Budget Office’s 2.1% estimate of potential growth.

As the following chart illustrates consumer spending in Q2 rebounded strongly at a 4.3% annual rate after two-quarters of subnormal low growth. The consumer rebound also boosted real final sales and contributed 2.85 percentage points to total second-quarter GDP growth.

Foreign trade, however, detracted from growth in the quarter. Exports declined in Q2 while imports rose marginally, so at the margin trade detracted from US growth in the second quarter.

In other words, while inventories and trade provided the expected drag on the economy in the second quarter, domestic demand offered more than just an offset courtesy of consumption and unexpected strength for government spending.

Nonetheless, more worrisome is the fact that the real business side of the economy was soft in the second quarter, continuing a trend that has been noticeable since Trump took office. Indeed, this factor was behind the Fed’s cut to interest rates at the end of July.

Investment in structures declined at a 10.6% annual rate in Q2, while equipment investment was almost flat in the quarter.

Government spending, which was sparked by a huge 15.9% increase in nondefense spending, increased 5% in Q2 and contributed 0.85 percentage points to total GDP growth.

The key takeaway from the Advance estimate report is that so far this year economic growth has turned out to be stronger than many expected. Of course, the Fed still took out a bit of insurance policy by reducing the federal funds rate last month.

(Click on image to enlarge)

(Click on image to enlarge)

(Click on image to enlarge)