REUTERS

Gross domestic product rose at a 1.2% annualized rate after a 0.8% advance the prior quarter, Commerce Department figures showed Friday in Washington. The median forecast of economists surveyed by Bloomberg called for a 2.5% second-quarter increase.

The report raises the risk to the outlook at a time Federal Reserve policy makers are looking for sustained improvement. While consumers were resilient last quarter, businesses were cautious – cutting back on investment and aggressively reducing stockpiles amid weak global markets, heightened uncertainty and the lingering drag from a stronger dollar.

"We're just muddling through," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, who had forecast a 1% gain in second-quarter GDP. "Consumer spending looks good, but the problem is that the rest of the economy is soft. The economy remains vulnerable to downside risks. The Fed is right to be cautious."

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With Friday's report, the Commerce Department also issued its annual revisions, updating the data back through 2013. The first-quarter's reading was revised from a previously reported 1.1% gain.

The new breakdown shows a more pronounced slowdown in the economy heading into 2016. The year-over-year growth rate cooled from 3.3% in last year's first quarter to 1.9% in the final three months of 2015, rather than the previous downshift from 2.9% to 2%.

The easing in growth continued into the first half of this year. The year-over-year pace for the first quarter of 2016 was revised down to 1.6% from 2.1%, the revisions showed. That revised trajectory has implications for Fed officials, as they're faced with an expansion that has been steadily losing steam.

Friday's report also showed that in the second quarter, GDP expanded at a 1.2% rate from the same period a year earlier.

Economists' second-quarter estimates for GDP, or the value of all goods and services produced, ranged from 1% to 3.2%, according to a Bloomberg survey. The growth estimate is the first of three for the quarter, with the other releases scheduled for August and September when more information becomes available.

Inventories were reduced by $8.1 billion in the second quarter, the most since third quarter of 2011 and subtracting 1.16 percentage points from the economy. At the same time, leaner inventories could set the stage for a pickup in production later this year should demand hold up.

Household consumption, which accounts for about 70% of the economy, grew at a 4.2% annualized rate, the biggest jump since the end of 2014 and adding 2.83 percentage points to growth. That followed a revised 1.6% increase from January through March. The Bloomberg survey median forecast for the second quarter was 4.4%.

Business Spending

Corporate spending on equipment, structures and intellectual property, decreased an annualized 2.2% after a 3.4% fall in the first quarter. Outlays for equipment dropped for the fourth time in the past five quarters. Spending on structures – everything from factories to shops to oil rigs – have increased in just one quarter since the end of 2014.

Inventories and the trade gap are two of the most volatile components in GDP calculations. To get a better sense of demand in the U.S., economists look at final sales to domestic purchasers, or GDP excluding inventories and net exports. That measure increased 2.1% last quarter after a 1.2% gain.

Also holding back economic growth in the second quarter was a decrease in residential investment, which fell at a 6.1% pace. That was the most since the third quarter of 2010 and marked the first decrease in two years.

Government spending also shrank last quarter, declining 0.9%, the most in more than two years as outlays for the military fell. States and municipalities also cut back.

The GDP report also showed price pressures remain limited. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 1.7% annualized pace compared with 2.1% in the prior quarter.

Fed policy makers, who left interest rates unchanged this week, said risks to the U.S. outlook have "diminished" and the labor market is getting tighter, suggesting conditions are turning more favorable for an increase in borrowing costs.