U.S. 4% GDP Growth Seen More ‘Luck of the Draw’ Than New Reality
(Bloomberg) -- The U.S. economy may have hit 4 percent growth in the second quarter, the fastest since 2014 and a feat President Donald Trump will tout as a sign of his success. It’s more like a winning hand that doesn’t come up often.
Gross domestic product expanded at a 4.3 percent annualized rate in the April-June period, according to the Bloomberg survey median, with forecasts ranging as high as 5.4 percent. The stars were aligned following 2 percent growth in the first quarter: The biggest tax overhaul since the Reagan era delivered another boost to consumer spending and business investment, and the volatile categories of inventories and trade probably juiced the number -- helped by a likely temporary jump in soybean exports ahead of retaliatory tariffs.
While there’s much to like about the economy right now, analysts reckon the confluence of positive forces will give way to solid, albeit less spectacular, numbers in the second half and beyond as the tax stimulus begins to fade, the Federal Reserve raises borrowing costs further and the expansion ages. The burgeoning risk from tariff wars makes it even more unlikely that the torrid second-quarter performance is a new normal.
“It is just the luck of the draw,” said Gus Faucher, chief economist at PNC Financial Services Group Inc. in Pittsburgh. “In the second quarter, we had a lot of components adding to growth.” While “the economy is in good shape,” the projected surge is “temporary” and “the result of the fiscal stimulus,” he said. “It’s not a 4 percent economy.”
The GDP report, due from the Commerce Department on Friday in Washington, will also include comprehensive revisions to decades of data.
Beyond the headline number, the scorecard will probably be less of a barnburner.
Economists looking for a better sense of underlying demand typically exclude volatile components from the GDP calculations. One gauge that eliminates trade, inventories, and government outlays -- final sales to private domestic purchasers -- probably grew around or slightly above the average 2.8 percent pace for this expansion, rather than being a blowout.
Faucher forecasts a 3.2 percent gain for that measure of underlying demand with headline GDP growth of 4.1 percent. Gregory Daco of Oxford Economics sees final private domestic sales rising 2.7 percent, alongside a 4.5 percent GDP gain that “is unlikely to be repeated later this year.”
“I don’t think the longer-run picture has changed much,” PNC’s Faucher said. Post-stimulus, “we’re back in a 2 percent world.”
Overall GDP growth has averaged 2.2 percent since the recession ended in mid-2009. The second-quarter projections would bring the first-half pace to 3 percent, matching Trump’s long-run goal.
Administration officials are already taking victory laps. White House economic adviser Larry Kudlow said last week that the economy is starting to grow 4 to 5 percent and others will copy the nation. He also hinted at more steps on taxes, citing some lawmakers’ wish to make individual cuts permanent.
For now, the fiscal stimulus is adding steam to an economy that’s already come a long way in the nine years of this expansion and is poised to surpass $20 trillion in nominal dollars. Unemployment near the lowest level since 1969, steady hiring and low inflation also are bolstering consumption, which accounts for about 70 percent of GDP. Lower taxes and still-easy monetary policy are supporting investment and buoying corporate profits.
What Our Economists SaySecond-quarter growth will rebound from a somewhat lackluster start to the year due largely to a handful of idiosyncratic factors. Supply-chain adjustments in response to escalating trade tensions will reduce the drag from net exports, and residual seasonality -- the remaining seasonal effects in the BEA data after adjustments -- will boost the reported number in 2Q, after pulling it down in 1Q. Expect growth to moderate in the second half as conditions in the external sector calm and the pace of recovery in the housing market continues to slow.
-- Carl Riccadonna and Tim Mahedy, Bloomberg Economics
Read more for the full week-ahead preview from Bloomberg Economics.
That’s helped put a floor under the stock market even as tariff threats cloud the outlook for growth and inflation. Besides, the U.S. also is the brightest spot among developed economies, offering a tailwind to the dollar, whose strength Trump said Friday is hurting the country.
Even so, the president is counting on keeping growth going at full swing as he escalates the trade war with China, the European Union, Canada and Mexico. Rates on benchmark 10-year Treasuries reflect the challenge. The flattening yield curve signals investors are skeptical that the economy can handle much higher rates from the Fed. Trump attacked the central bank’s hikes last week, breaking with two decades of bipartisan White House tradition of being hands-off with the Fed.
A more immediate concern is the twists and turns on tariffs, which are generating bad-news headlines of how higher import costs are hurting goods producers and overshadowing the mileage the administration could’ve drawn from Trump’s tax initiative. Americans’ sentiment is cooling, though still elevated enough to support spending.
If the uncertainty persists, corporate America may slow capital spending, which revved up in recent quarters as a second pillar of growth in addition to consumer purchases.
Many economists nevertheless expect minimal disruptions from the trade spat. Michael Englund, chief economist at Action Economics LLC, said the tax cuts will give a bigger lift to third-quarter consumption, though business investment may be more dispersed through 2018 and housing will have a “slow year.”
While he hasn’t penciled in 4 percent for any other quarter this year, “growth is quite strong,” said Englund, who expects around 3 percent in 2018 and 3.1 percent in 2019. “We’re outperforming a lot of people’s expectations.”
©2018 Bloomberg L.P.