Economy grows at fastest pace in four years
But 4.1% pace may be difficult to continue
A big rebound in spending by Americans and a sharp rise in exports and business investment powered the U.S. economy to its fastest growth in four years this spring, the government reported Friday.
The nation’s gross domestic product – the value of all goods and services produced in the U.S. – increased at a seasonally adjusted annual rate of 4.1 percent from April through June, the Commerce Department said. That’s the largest gain since the third quarter of 2014. Economists had predicted a 4.2 percent rise.
But at least part of the gains in the second quarter can be traced to U.S. businesses boosting exports ahead of tariffs imposed by President Donald Trump as part of his trade dispute with global trading partners. The benefit of companies pulling forward business activity is likely to reverse after the tariffs take effect in the third quarter and beyond. Those levies would make it difficult for the economy to keep up the fast past of growth, economists say.
It could also be hard for the current pace of growth to continue as the short-term boost from the tax law change fades and interest rates continue to move higher, Paul Ashworth, chief U.S. economist at research firm Capital Economics, wrote in a report.
“The economy enjoyed a strong first half of this year, but as the stimulus fades and monetary policy becomes progressively tighter, we expect GDP growth to slow markedly from mid-2019 onwards,” he wrote.
The robust growth in the past quarter, however, provided Trump an opportunity to reiterate that his economic policies, which include massive tax cuts and less regulation of businesses, are working.
In a media conference at the White House after the release of the GDP number Friday morning, Trump called growth north of 4 percent an “amazing rate.”
The president predicted the big jump was not a one-hit wonder and noted that the economy was on pace for its fastest annual growth rate in 13 years. “We are going to go a lot higher than these numbers,” he said.
White House aides had been planning Friday morning’s address all week, predicting a strong number would enable the president to promote his economic policies.
The predictors included Trump himself, who told a crowd in Illinois on Thursday: “GDP numbers will be announced tomorrow sometime. I don’t know what they are, but I – I think they’re going to be terrific.”
“Somebody actually predicted today, 5.3,” he said Thursday during the speech at a steel facility. “I don’t think that’s going to happen – 5.3. If it has a 4 in front of it, we’re happy. If it has like a 3 but it’s a 3.8, 3.9, 3.7, we’re OK.”
“This is a win for the administration and a win for the markets,” said Cliff Hodge, director of investments for Cornerstone Wealth in Charlotte, North Carolina.
Analysts had expected a sharp pickup after tepid 2 percent growth in the first quarter. That performance was partly chalked up to measurement problems the government has routinely faced early in the year.
The strong GDP number was goosed by a 4 percent rise in consumer spending, up sharply from less than 1 percent in the first quarter. That was a bright spot, as it shows consumer demand and consumption are strong, Michael Gapen, an economist at Barclays, told clients.
Trade also gave GDP a big boost, with net exports adding 1.06 percentage points to growth. Exports surged 9.3 percent, and business investments jumped 7.3 percent.
Economists expect slower but still solid growth of 2.5 to 3 percent in the second half of 2018 and close to 3 percent growth for the full year. That would meet Trump’s target of 3 percent or better growth, but the gains would largely be stoked by tax cuts and government spending increases that are expected to add to the deficit.
Many economists are forecasting a recession in 2020. Half the economists surveyed last month by the National Association of Business Economics foresee a recession starting in late 2019 or early 2020; two-thirds predict a slump by the end of 2020.
The 4 percent surge in consumer spending marks a sharp rebound after a tepid first quarter, when Americans hunkered down after splurging for the holidays. U.S. consumers, who account for roughly 70 percent of the nation’s total economic output, ramped up their outlays in recent months amid solid job and income growth. The tax overhaul, which lowered income tax rates, has put more money in the pockets of American workers.
“This is a win for the administration and a win for the markets.”
Cliff Hodge Director of investments for Cornerstone Wealth