* Second-quarter GDP forecast rising at 1.8% rate
* Inventories, trade expected to restrain growth
* Consumer spending seen accelerating
* Business investment forecast to have remained weak
By Lucia Mutikani
WASHINGTON, July 26 (Reuters) - The U.S. economy likely grew at its slowest pace in more than two years in the second quarter as an acceleration in consumer spending was probably offset by weak exports and business investment.
The anticipated moderation in growth will come against the backdrop of rising risks to the economy’s outlook, especially from a trade war between the United States and China as well as slowing growth overseas, which are seen encouraging the Federal Reserve to cut interest rates next Wednesday for the first time in a decade.
With a strong labor market supporting consumer spending, a recession is, however, not on the horizon. The Commerce Department will publish the second-quarter gross domestic product (GDP) report on Friday at 8:30 a.m. EDT (1230 GMT).
“The slowing in the economy spooked the Fed and markets, but the sky is not falling,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “If we do get a recession next year it would be because we shot ourselves in the foot with the trade tensions.”
Gross domestic product probably increased at a 1.8% annualized rate in the second quarter, also because of a smaller inventory build, according to a Reuters survey of economists, after surging at a 3.1% pace in the January-March period.
But with the volatile exports and inventory categories accounting for much of the expected step-down in GDP, the slowest growth pace since the first quarter of 2017 will likely mask some underlying strength in the 10-year economic expansion, the longest in history.
The survey was completed before the release of June wholesale and retail inventories as well as durable goods and goods trade deficit data, which led the Atlanta Fed to cut its forecast by three-tenths of a percentage point to a 1.3% rate.
The economy is slowing largely as the stimulus from the White House’s $1.5 trillion tax cut package fades. The tax cuts together with more government spending and deregulation were part of measures adopted by the Trump administration to boost annual economic growth to 3.0% on a sustained basis.
The economy grew 2.9% in 2018 and growth this year is expected to be around 2.5%. Economists estimate the speed at which the economy can grow over a long period without igniting inflation at between 1.7% and 2.0%.
“As the benefits of fiscal stimulus fade and trade policy uncertainty and slowing global demand remain headwinds to business investment, U.S. GDP growth should moderate,” said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
The GDP report is also expected to show a pickup in inflation last quarter, but the overall trend likely remained benign. The government will also publish revisions to GDP data from 2014 through the first quarter of 2019.
Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, is expected to have surged after slowing to a 0.9% rate in the first quarter, the weakest in a year. Some of the slowdown in consumer spending early in the year was blamed on a 35-day partial shutdown of the government. Spending is being supported by the lowest unemployment rate in nearly 50 years, which is lifting wages.
The jump in consumer spending was, however, likely blunted by a sharp drop in exports, in a reversal of the strong growth experienced in the first quarter. Weak exports are expected to have resulted in the deterioration of the trade deficit in the second quarter. Trade is believed to have subtracted from GDP growth last quarter after contributing 0.94 percentage point in the January-March period.
The acceleration in consumer spending likely helped businesses to whittle down an inventory overhang, resulting in a smaller inventory build. While that probably weighed on GDP growth in the second quarter, it is a potential boost to manufacturing. Businesses have been placing fewer orders with factories while working through stockpiles of unsold goods, which contributed to undercutting manufacturing production.
Business investment was probably weak in the second quarter, with spending on equipment expected to have contracted again after declining at its steepest pace in three years in the January-March period.
Fed Chairman Jerome Powell early this month flagged business investment as one area of weakness in the economy, noting it had “slowed notably,” and that this might “reflect concerns about trade tensions and slower growth in the global economy.”
Design problems at aerospace giant Boeing have hurt business investment, with some spillover to exports.
Boeing reported its biggest-ever quarterly loss on Wednesday due to the spiraling cost of resolving issues with its 737 MAX airplane and warned it might have to shut production of the grounded jet completely if it runs into new hurdles with global regulators to getting its best-selling aircraft back in the air.
The plane was grounded worldwide in March after two fatal crashes in Ethiopia and Indonesia. Production of the aircraft has been reduced and deliveries suspended. Economists estimate the 737 MAX troubles cut at least two-tenths of a percentage point from GDP growth in the second quarter.
“There could be more noticeable effects on various growth components, with weakness in related equipment spending and exports and a partially offsetting increase in inventories,” said Daniel Silver, an economist at JPMorgan in New York.
Business spending on structures, which include oil and gas well drilling, is expected to have declined last quarter. Spending on intellectual products, including research and development, likely increased.
Strong growth in government investment is expected, but spending on homebuilding likely contracted for a sixth straight quarter. (Reporting by Lucia Mutikani; Editing by Andrea Ricci)