Q2 Growth Tops 4% as Economy Continues to Steam Ahead

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The U.S. Bureau of Economic Analysis reported 4.1% annualized growth in real Gross Domestic Product for the second quarter of 2018. BEA’s benchmark revision lowered growth modestly during the past year but did not alter the near 3% growth clip the economy has been enjoying since the middle of 2017. The current strong trend is supported by elevated business and consumer confidence measures, as well as the implementation of tax cuts. Effects from increased government spending should allow growth to pickup to around a 3.5 percent pace through the end of the year before the withdrawal of stimulus measures results in a somewhat slower, but still strong, 2019.

Consumer spending led the way with 4.0% growth, offsetting a weak first quarter performance, driven by both low unemployment and larger paychecks due to individual tax cuts. Nondurable goods enjoyed particularly strong growth. A tightening labor market could add to spending power moving forward if it causes wage growth to accelerate.

While consumers are spending generally, this is not translating into accelerating housing demand. Rising material and labor costs may also be playing a role in negative residential investment growth. With the Federal Reserve likely to boost rates twice more in 2018, following today’s growth performance and rising upward pressure on prices, higher mortgage rates may also dissuade home buyers.

Export growth was unusually strong this quarter due in part to increased demand for US soybeans, but the strength of the dollar suggests that import growth should be faster than export growth in the coming quarters. The spread of tariffs would serve to reduce trade volume rather than altering the trade balance as key US trading partners are imposing retaliatory tariffs.

Tariffs could weigh more heavily on firm investment activity. Capital equipment investment growth slowed in the second quarter despite support provided by new tax measures, possibly because of caution related to imposed and pending tariffs. Nonresidential structures growth in contrast has been quite strong during the first half of the year, with high oil prices driving increased drilling activity. Intellectual property products investment too has been quite strong during the first half of 2018.

So long as tariff proliferation is avoided, the US economy should strengthen during the remainder of 2018 before gradually decelerating back towards its long-term trend later in 2019.