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The US 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 annualised 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 on Friday. Consumer spending grew 4%, more than estimated, while nonresidential business investment climbed at a 7.3% clip.
Trump seized the chance to declare his policies, including the biggest tax overhaul since the Reagan era, a success, calling the data “amazing” and “very sustainable”.
The likelihood is nevertheless that the pace of expansion will slow as the effects of tax cuts fades, companies pull back in the face of foreign tariffs or strong dollar and the Federal Reserve raises interest rates further.
“The economy is doing quite well,” said Michael Feroli, chief US economist at JPMorgan Chase & Co. “It’ll be hard to repeat this performance on a sustained basis.”
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, Commerce said, citing soybean stocks as well as those of drugs and sundries and petroleum and related products.
Fed 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.
'Great Numbers'
Trump, speaking on Friday at the White House, celebrated the report and said the economy is on track to reach an annual growth rate of more than 3%. “As the trade deals come in one by one, we’re going to go a lot higher than these numbers, and these are great numbers,” the president said.
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.
To be sure, there is evidence that tax reforms and cuts are helping to stimulate activity, but the performance of consumer spending in the second quarter is unlikely to carry through in full force into the second half of the year. As a result, the overall pace of growth will moderate, said economists Carl Riccadonna and Tim Mahedy of Bloomberg Economic.
Bloomberg Economics is maintaining its forecast for 2.8% growth in the second half. Consumers are benefiting from tax cuts and a tighter labour market, but household income creation has not yet accelerated to a pace that can support 4% growth on a sustained basis, said Riccadonna and Mahedy.
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. “Producers may have front-loaded some goods for exports ahead of the tariffs,” JPMorgan’s Feroli said.
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 defence 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% annualised rate last quarter, following 2.2% in the first three months of the year.
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