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Who's Powering U.S. Economic Growth? Consumers.

The U.S. economy grew by only 1.2 percent in the second quarter, despite robust consumer spending .
/ Source: Reuters

Friday's Commerce Department figures demonstrated a mere 1.2 percent growth in gross domestic product, far lower than the expected 2.6 percent annual rate.

The U.S. economy did regain some speed in the second quarter as robust consumer spending offset a sharp moderation in inventory investment and weak exports, pointing to underlying growth momentum that could be maintained for the rest of the year.

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"The economy clearly bounced back in the second quarter because consumers put the economy on their backs. Things are falling in place, the economy will continue to move forward," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

The Federal Reserve, which on Wednesday left interest rates unchanged, said near-term risks to the economic outlook had "diminished." The Fed raised its benchmark overnight interest rate in December for the first time in nearly a decade.

"The worry for the Fed is that you have a two-sided economy with strong consumer spending but weak investment. They will continue to put a rate hike on the table but they will end up procrastinating," said Thomas Costerg, a senior U.S. economist at Standard Chartered Bank in New York.

With the second-quarter GDP snapshot, the government will also publish revisions to data going back to 2013 through the first quarter of 2016. The revisions are expected to partially address measurement issues, which have tended to lower first-quarter GDP estimates.

Consumer spending was likely responsible for almost all of the rebound in GDP growth last quarter. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is expected to have increased at its fastest pace since 2006.

Economists say a tightening labor market, rising house prices and higher savings should underpin spending for the rest of 2016.

"There are good reasons to expect strong consumption," said Anthony Karydakis, chief economic strategist at Miller Tabak in New York. "As long as you see the strength in consumption continuing, that gives a very reliable marker of the underlying momentum in the economy."

Economists expect a marginal impact on growth from Britain's departure from the European Union. They estimate that the so-called Brexit could subtract about two-tenths of a percentage point from GDP growth over the next year.

Businesses likely pulled back sharply on their pace of inventory accumulation, which could result in inventory investment subtracting as much as one percentage point from GDP growth. That would be the fourth straight quarter that inventories have weighed on output.

Read More: Consumer Spending Posts Biggest Gain in More Than Six Years

But a smaller inventory build is a good signal for growth in the coming quarters.

The lingering effects of the dollar's rally and weak global demand probably continued to hobble exports in the second quarter, while imports poured in to meet robust domestic demand. Trade is expected to have been a drag on GDP growth after making a modest contribution in the first quarter.

Business spending is expected to have contracted for a third consecutive quarter, the longest stretch since the 2007-2009 recession, though the pace of decline likely slowed.

Business spending has been hurt by lower oil prices, which have squeezed profits in the energy sector, forcing companies to cut capital spending budgets. Economists say uncertainty over global demand and the upcoming U.S. presidential election are also making companies cautious about spending.

Investment in residential construction and spending by the government likely fell in the second quarter. Economists say the decline will be payback after strong gains in the first quarter.