U.S.’ 2Q economic growth at 4.2% rate
Analysts expect trade drag ahead
WASHINGTON — The U.S. economy grew at a robust annual rate of 4.2 percent in the second quarter, the best performance in nearly four years, though economists believe growth has slowed in the current quarter partly because of a drag from trade.
The performance of the gross domestic product, the country’s total output of goods and services, was unchanged from an estimate the Commerce Department made last month, the government reported Thursday.
The strong GDP performance has been cited by Presi- dent Don- ald Trump as proof that his econom- ic program is working.
However, a big part of the growth in the quarter reflected a temporary rush to ship soybeans and other U.S. exports out before penalty tariffs triggered by Trump’s get-tough trade policies took effect.
Economists believe growth has slowed in the current quarter to between 3 percent and 3.5 percent, still a solid pace. While trade boosted GDP by 1.2 percentage point in the second quarter, attributed to a surge in exports, it is expected to trim growth by around 1 percentage point in the third quarter. Some of that weakness may be offset by businesses rebuilding their inventories at a stronger pace.
“Growth still looks quite strong,” Jim O’Sullivan,
chief U.S. economist for High Frequency Economics, said in describing the revised GDP report for the second quarter. He said he was forecasting third- and fourth-quarter growth at around 3 percent “before momentum starts to fade in 2019.”
A 3 percent growth average in the second half of this year would leave the annual growth in 2018 at 3 percent. That would be the best performance since 2005, three years before the 2008 financial crisis pushed the country into the worst recession since the 1930s.
The nation is currently in the 10th year of an economic expansion, the second-longest in history. But growth has averaged a lackluster 2.2 percent, making this the weakest recovery in the postWorld War II period.
Trump often noted that performance when he campaigned for president, blaming the weakness on economic policies of President Barack Obama’s administration. He pushed a $1.5 trillion tax cut through Congress in December, and has emphasized deregulation and vowed tougher enforcement of trade agreements.
The administration is projecting growth to return to sustained rates of 3 percent or better over the next decade. Others disagree with that assessment, forecasting that growth will slow sharply in coming years as the effects of the tax cuts and increased government spending this year begin to fade. There is also an expectation that rising interest rates from the Federal Reserve will temper growth.
On Wednesday, the Fed pushed its key policy rate up for an eighth time to a new range of 2 percent to 2.25 percent.
As he has done recently, Trump criticized that move, but Fed Chairman Jerome Powell told reporters at a news conference Wednesday that outside criticism would have no impact on the Fed’s efforts to follow its mandate of promoting maximum employment and stable prices.
The Fed indicated that it planned to stick with its plan to raise rates one more time this year and another three times in 2019.
In remarks Thursday, Powell said the central bank’s gradual interest-rate increases are helping sustain the economic expansion.
“Our economy is strong. Growth is running at a healthy clip,” Powell told a gathering of business leaders in Washington hosted by U.S. Sen. Jack Reed, D-R.I. “As the economy has steadily gained strength, the Fed has been gradually returning interest rates closer to the levels that are normal in a healthy economy.”
The government’s third and final look at second-quarter GDP showed only minor and off-setting changes. Consumer spending, which accounts for 70 percent of economic activity, was unchanged at a solid growth rate of 3.8 percent. Business investment grew at a strong 8.7 percent rate, up slightly from last month’s estimate of an 8.5 percent growth rate.
The merchandise-trade deficit unexpectedly grew in August to $75.8 billion, the widest in six months and close to a record, as exports of food, industrial supplies and autos declined, Commerce Department data showed Thursday. A separate report from the department signaled that corporate investment took a breather, with business-equipment orders at U.S. factories falling in August after a run of strong gains, while shipments of those items slowed.
Economists at JPMorgan Chase & Co., Amherst Pierpont Securities and Capital Economics trimmed their estimates for third-quarter gross domestic product growth. Before Thursday’s data, the median estimate in a Bloomberg survey was for 3 percent expansion.
While analysts said the trade deficit partly reflected an expected reversal of the second-quarter’s surge in soybean exports before Chinese-imposed tariffs, and GDP growth is seen remaining solid, the numbers illustrate how the trade war is spurring volatility in the data.
In addition, the widening deficit runs contrary to Trump’s aim of a narrower gap and underscores the challenges of achieving that goal during strong domestic demand — which tends to boost imports — and retaliatory tariffs from abroad.
“The data are grim,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., said in a note, referring to the August goods-trade gap. “The administration’s narrative, that the second-quarter drop in the [trade] deficit was a result of their trade policies, has now fallen apart, as it was always likely to do.”
Another report Thursday showed global trade is continuing to lose a little steam during the tariff battle between the U.S. and China, the world’s two biggest economies. Freight and logistics company DHL said its trade barometer weakened in September, dropping to the lowest since 2016 and indicating a slower pace of growth in the months ahead.
Also Thursday, the World Trade Organization cut the outlook for global commerce through 2019 and warned that tension between major trading partners increasingly threatens economic growth.
While economists say it may be too early to detect the exact U.S. impact from trade disputes, the data bear watching as the headwinds and uncertainty look unlikely to dissipate soon.
Thursday’s reports come after the U.S. and China imposed tariffs on each other in late August, which followed others implemented in early July. The U.S. added tariffs on another $200 billion of Chinese imports this week — the largest escalation of the trade war so far.
“Net exports will be a drag” in the July-September period, “but inventories will be a positive,” said Paul Ashworth, chief U.S. economist for Capital Economics, who trimmed his GDP growth forecast to 3 percent, from a gain of between 3 percent to 3.5 percent. That amounts to a pace of expansion that is “still very good, just not very, very strong like the second quarter.”
Information for this article was contributed by Martin Crutsinger of The Associated Press; and by Shobhana Chandra, Nancy Moran, Sarah Foster and Christopher Condon of Bloomberg News.