​The U.S. economy gained strength in the second quarter, growing at an annualized rate of 2.6% from the previous quarter, far better than the 1.2% pace in the first quarter and in line with the consensus forecast. Compared to a year ago, the economy grew 2.1%, up from the first quarter’s 2.0% pace.

Consumer spending rebounded from a fairly weak first quarter, rising 2.8% from the previous quarter following the first quarter’s tepid 1.9% tally. Spending on goods rose 4.7%, as durable goods spending increased 6.3% and non-durable goods spending rose 3.8%, while spending on services rose just 1.9%. Gross private domestic investment rose 2.0%, but that was coming off a decline in the first quarter. Nonresidential investment rose 5.2%, driven by a strong 8.2% increase in equipment. Spending on structures rose 4.9% while spending on intellectual property inched up by 1.4%. Following a strong first quarter, residential investment fell 6.8%, the biggest decline since the third quarter of 2010. Private inventories actually declined in the second quarter, the first time that has happened since the third quarter of 2011 and certainly a big reason why overall growth was not stronger. Exports rose 4.1% while imports rose just 2.1%, helping to narrow the trade deficit slightly. Government spending rose 0.7%, but it was all at the federal level as national defense spending rose 5.2% while non-defense spending fell 1.9%. Meanwhile, state and local government spending declined 0.2%.

​The contributions to growth were as follows: consumer spending 1.93 percentage points (pp), gross private domestic investment  0.34 percentage points (pp), which was weighed down by a decline in inventories, net exports 0.18 pp and government spending 0.12 pp.

​Today’s report is welcome news following two quarters of fairly weak economic growth, and will certainly be some relief for the Trump administration that appears to be in complete political chaos at the moment. Unfortunately, the vast majority of growth was from consumer spending, while all other parts of the economy contributed very little to growth. It was also disappointing to see one of the economy’s major drivers since the recession, residential investment, take a step back even though mortgage rates have been trending down recently. Should the Federal Reserve either raise the Fed Funds rate or start to trim its balance sheet, mortgage rates could rise and might put a big dent in housing and the economy. Thus, the Fed best tread carefully.

The U.S. economy was very weak in the first quarter, growing at an annualized rate of just 0.7% from the previous quarter, far below the 2.1% pace in the fourth quarter and less than the 1.1% consensus forecast. Compared to a year ago, the economy grew 1.9%, down from the fourth quarter’s 2.0% pace.

Gross private domestic investment drove what little growth there was in the first quarter, rising 4.3% from the previous quarter. Still, this was half the rate of growth seen in the fourth quarter. Non-residential investment rose a strong 9.4%, the most since the last quarter of 2013, driven by a big rebound in investment in structures and solid growth in investment in equipment. Residential investment also had a strong quarter, rising 13.7%, as the housing market continued to sizzle with construction, sales and prices all rising. On the other hand, the change in private inventories subtracted from growth. In a break with recent trends, consumer spending was very weak, rising just 0.3%, the slowest growth since the fourth quarter of 2009. Spending on goods rose just 0.1%, as non-durable goods rose 1.5% but durable goods plunged 2.5%, primarily due to a big pullback in purchases of motor vehicles. This may have been due, in part, to a rise in auto loan rates since the presidential election. However, consumption of services was also weak, rising just 0.4%, the least in four years. Trade contributed a sliver of growth as exports rose slightly more than imports. On the downside, government spending fell 1.7%, as national defense spending plunged 4.0% while state and local government spending fell 1.6%.

​The contributions to growth were as follows: gross private domestic investment  0.69 percentage points (pp), which was weighed down by a lack of inventory building, consumer spending 0.23 pp, trade 0.07 pp and government spending -0.3 pp.

​Today’s report is the first look at the overall economy under new President Donald Trump. While growth was very disappointing, it came after relatively strong growth in the second half of last year, and is not much of an aberration from the Obama years. Although the first three months of his administration were lackluster, there were no significant changes to economic policy during this time. The healthcare bill failed and tax reform, trade and infrastructure were not even addressed. Early in Trump’s first term, optimism remains high but uncertainty is widespread.