Economic Growth

US Growth Hits 4.1%, Fastest Since 2014

July 27, 2018
The scorecard gives President Trump a chance to highlight the success of his policies, including the biggest tax overhaul since the Reagan era.

The U.S. economy accelerated to a 4.1% pace of growth in the second quarter, the fastest since 2014, letting President Donald Trump claim a win for his policies even though expansion is projected to cool.

The annualized rate of gains in gross domestic product was just shy of the 4.2% median forecast in a Bloomberg survey. It followed first-quarter growth of 2.2% that was revised from 2%, the Commerce Department reported Friday. Consumer spending grew 4%, more than estimated, while nonresidential business investment climbed at a 7.3% clip.

Illustrating the volatility of some elements of GDP, net exports contributed 1.06 percentage point to the pace of growth, the most since 2013, partly on a surge in soybean shipments ahead of retaliatory tariffs. Inventories subtracted 1 point, the most since 2014, also on soybean stocks as well as those of drugs and sundries and petroleum and related products.

Nevertheless, the scorecard gives Trump a chance to highlight the success of his policies, including the biggest tax overhaul since the Reagan era, which probably boosted consumer spending and business investment. Yet the risks from tariff wars and a fading effect from tax cuts are among reasons analysts see difficulty keeping the economy growing at such a robust pace.

Even so, Federal Reserve policy makers are expected to continue their gradual pace of interest-rate hikes aimed at keeping the economy from overheating, without moving so fast that they could choke off growth. The dollar and yields on 10-year Treasuries declined after the report, which also showed inflation excluding food and energy was lower than estimated.

“I wouldn’t want to overstate the underlying strength in GDP growth based on Friday’s numbers,” Omair Sharif, senior U.S. economist at Societe Generale, said before the report. “There was a big boost from trade, but that’ll go away.” Going forward, “it’s highly unlikely we’ll get 4% growth, or even 3% on a sustained basis.”

'Terrific' Numbers

Trump on Thursday was managing expectations for the release, saying the figures would be “terrific” even if growth might not be as high as 5.3%. “If it has a 4 in front of it, we’re happy,” while 3.7% or above would be OK, he said in Granite City, Illinois.

National Association of Manufacturers Chief Economist Chad Moutray on today's US GDP announcement:

“Over the last six months, tax reform and regulatory relief have sparked the robust manufacturing job growth we predicted, improving lives and livelihoods across the country. The business optimism of our member companies stands at a record high, and 86% of them plan to invest in new plants and equipment, 77% plan to increase hiring, and 72% plan to increase wages and benefits for workers. That is driving the robust growth we are now seeing reflected in today’s report, placing an urgent need to grow and upskill the manufacturing workforce to fill the 441,000 jobs currently open and the 3 million or more that will need to be filled by 2025."

Economists’ forecasts for second-quarter GDP, the value of all goods and services produced in the nation, ranged from 3% to 5%. The GDP estimate is the first of three for the quarter, with the other releases scheduled for August and September when more information becomes available.

With the Friday data, the Commerce Department also released comprehensive GDP revisions going back decades. They showed a higher household-saving rate than previously reported, as well as faster growth in the first quarter of recent years, though the overall narrative of the economy’s performance over the last decade wasn’t much different.

The revisions also showed the economy surpassed $20 trillion in nominal dollars in the first quarter.

Even with the relatively strong pace of growth last quarter, most economists expect expansion to settle back to near its long-run rate, and some have flagged the risk of a recession in two years. While polls and historical trends suggest Democrats are primed for significant gains in November’s midterm elections, voters give Trump high marks for the economy.

GDP Goal

Compared with a year earlier, second-quarter GDP rose 2.8%, just shy of the 3% mark, which was last reached in 2015. The Trump administration’s official goal is for sustained GDP growth of 3%, which would well exceed the average 2.2% pace during this expansion and the Fed’s longer-run expectation of 1.8%.

One measure that economists look at for a better sense of underlying demand showed strength. Final sales to private domestic purchasers -- which exclude trade, inventories and government outlays -- grew at a 4.3% pace, the second- fastest since 2014.

The pace of expansion in consumer spending, which accounts for about 70% of the economy, exceeded projections for 3% and contributed 2.69 percentage points to growth. Purchases of new autos were a major factor, along with spending on health care, housing and utilities and food services and accommodations. That followed a downwardly revised 0.5% pace of consumption growth in the prior three months.

In addition to lower taxes, consumers’ purchasing power is benefiting from steady hiring, an unemployment rate that’s near the lowest since 1969, improving finances, relatively low borrowing costs and contained inflation.

Business Investment

The growth in nonresidential business investment contributed almost 1 percentage point to growth though the 7.3% pace was slower than the first quarter’s 11.5%. Spending on structures advanced 13.3% following a 13.9% gain in the prior period, while equipment investment cooled to 3.9% and intellectual property spending slowed to 8.2%.

Housing remained a weak spot in the economy amid signs that the sector is poised for its broadest slowdown in years. Residential investment contracted at a 1.1% rate, the fourth decline in five quarters. The drag on overall growth, though, was negligible.

The contribution from net exports reflected a 9.3% gain in shipments abroad and a 0.5% increase in imports. In addition to soybeans, exports were boosted by petroleum and related products.

Government spending increased at a 2.1% rate, adding 0.37 percentage point to growth. Federal outlays rose 3.5%, the second-fastest rate since 2014, boosted by defense spending. State and local outlays advanced 1.4%.

Spending Power

The data showed consumers’ wallets grew at a slower pace. After- tax incomes adjusted for inflation increased at a 2.6% annual pace, after 4.4% in the prior quarter. The saving rate fell to 6.8% from 7.2%, which was revised from 3.3% as part of the comprehensive update.

First-quarter gross domestic income, adjusted for inflation, was revised to a 3.9% gain from a previously reported 3.6%.

Price data in the report indicated that inflation was in line with the Fed’s goal. Excluding food and energy, the central bank’s preferred price index rose at a 2% annualized rate last quarter, following 2.2% in the first three months of the year.

By Shobhana Chandra

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Licensed content from Bloomberg, copyright 2016.

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