WASHINGTON: The US economy grew by 4.1% year-on-year 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 GDP gain followed first-quarter growth of 2.2%, the Commerce Department reported on Friday. Consumer spending grew 4%, more than estimated, while non-residential business investment climbed by 7.3% from a year earlier.
Illustrating the volatility of some elements of GDP, net exports contributed 1.06 percentage points 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, officials said, citing soybean stocks as well as those of drugs and sundries and petroleum and related products.
Nevertheless, the scorecard gives 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 policymakers 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.
“The economy is doing quite well,” said Michael Feroli, chief US economist at JPMorgan Chase. “It will be hard to repeat this performance on a sustained basis”, as the boost to demand from tax cuts may fade, the dollar’s strength could curb exports and tariffs present a risk, he added.
The latest data won’t change the pace of the Fed’s interest-rate hikes, Feroli said.
Trump earlier was managing expectations, saying the figures would be “terrific” even if growth might not be as high as 5.3%. “If it has a 4 in front of it, we’re happy,” while 3.7% or above would be okay, 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% 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.
Even with the relatively strong pace of growth, 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.
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%.
The pace of expansion in consumer spending, which accounts for about 70% of the economy, exceeded projections for 3% and contributed 2.69 points to growth. Purchases of new automobiles 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 is near the lowest since 1969, improving finances, relatively low borrowing costs and contained inflation.
The growth in non-residential business investment contributed almost 1 percentage point to growth though the 7.3% pace was slower than the first quarter’s 11.5%.
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.