Rebound in Second Quarter Keeps U.S. Economy on Modest Growth Path

Estimated reading time: 1 minute

The U.S. Bureau of Economic Analysis today reported 2.6% annualized growth in real Gross Domestic Product for the second quarter of 2017, and that first quarter growth was revised down from 1.4% to 1.2%.

Stronger second quarter GDP numbers show that the pace of growth has been near its 2.0% long-term trend so far in 2017. 

Consumption accelerated in Q2 after a middling Q1 figure. Tight labor market conditions should keep disposable income rising steadily and could eventually accelerate wage and income growth. Increased consumer confidence also helped generate faster consumer spending.

Big ticket purchases remain an area of concern moving forward despite strong durable goods growth this quarter. Car sales have pulled back since the end of 2016. Pent-up demand from during and after the Great Recession has ebbed.

Labor shortages in the construction industry may have temporarily arrested strong growth in residential investment. Still, with demand growth solid, builders are eager to move ahead with new construction if they can find and pay for the workers to do it.

Elevated business confidence levels have helped non-residential investment growth slightly exceed post-recession trends, even excluding energy. Equipment growth has been particularly strong so far this year. Confidence alone though may not allow this trend to continue in the second half of 2017. Firms have not gained pricing power. This leads to a weak environment for corporate profits. Solid but non-accelerating wage growth and the slow pace of Federal Reserve normalization, mean that increases in labor and capital costs are not creating a sense of urgency for executives to invest more. With inflation contained below two percent for now, the Federal Reserve is likely to raise rates only once more this year. Non-residential investment growth may lose some momentum during the back half of the year, especially with delays in corporate tax reform.

A weaker dollar is helping exports grow faster than imports. So long as good job prospects continue boosting consumption, the economy has room to grow at or above its present 2 percent trend through the end of 2017, even if investment softens during the rest of the year.