US GDP growth hits 4.1%, fastest since 2014, in win for Trump

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                                           (World Today Friday 27 July 2018)

      US GDP growth hits 4.1%, fastest since 2014, in win for Trump

Bloomberg

Updated 27 July, 2018

WASHINGTON — Consumer spending propelled US economic growth to a 4.1 per cent pace in the second quarter, the fastest since 2014, letting President Donald Trump claim a win for his policies even though most analysts see the high as temporary.

The annualised rate of gains in gross domestic product was just shy of the 4.2 per cent median forecast in a Bloomberg survey. It followed first-quarter growth of 2.2 per cent that was revised from 2 per cent, the Commerce Department reported on Friday (July 27). Consumer spending grew 4 per cent, more than estimated, while nonresidential business investment climbed at a 7.3 per cent 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 a decline in soybean stocks as well as those of drugs and sundries and petroleum and related products.

Nevertheless, the scorecard gives Mr 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.

"I wouldn't want to overstate the underlying strength in GDP growth based on Friday's numbers," Omair Sharif, senior US 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 per cent growth, or even 3 per cent on a sustained basis."

'Terrific' Numbers

Mr 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 per cent. "If it has a 4 in front of it, we're happy," while 3.7 per cent or above would be OK, he said in Granite City, Illinois.

Economists' forecasts for second-quarter GDP, the value of all goods and services produced in the nation, ranged from 3 per cent to 5 per cent. 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 US$20 trillion (S$27 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 per cent, just shy of the 3 per cent mark, which was last reached in 2015. The Trump administration's official goal is for sustained GDP growth of 3 per cent, which would well exceed the average 2.2 per cent pace during this expansion and the Fed's longer-run expectation of 1.8 per cent.

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 per cent pace, the second- fastest since 2014.

The pace of expansion in consumer spending, which accounts for about 70 per cent of the economy, exceeded projections for 3 per cent 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 per cent 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 per cent pace was slower than the first quarter's 11.5 per cent. Spending on structures advanced 13.3 per cent following a 13.9 per cent gain in the prior period, while equipment investment cooled to 3.9 per cent and intellectual property spending slowed to 8.2 per cent.

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 per cent rate, the fourth decline in five quarters. The drag on overall growth, though, was negligible.

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

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

Spending Power

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

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

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 per cent annualized rate last quarter, following 2.2 per cent in the first three months of the year. BLOOMBERG