Second Quarter GDP Report – Strong growth, but is it sustainable?

Q2 2018 US GDP Growth
The first estimate of second quarter GDP growth showed that the U.S. economy grew at a solid pace, driven in part by the recently enacted tax cut. The economy grew 4.1% in the second quarter, the strongest reading since the third quarter of 2014. The largest contributor to growth was a 4.0% increase in consumer spending. Business investment growth was also solid at 7.3%. However, a drawdown in inventories offset the entirety of this underlying investment growth. Government expenditures were another positive contributor, increasing 2.1% during the quarter. The final component of GDP, net exports, added 1.06% to growth, as exports surged 9.3%. While at first glance the export growth appears to be a very positive piece of data, it is an aberration that may be unsustainable moving forward. Almost all the growth in exports derived from a surge of soybean and other agricultural shipments ahead of pending tariffs beginning on July 1st. This means that the surge is likely to be reversed next quarter. 

In sum, while part of the boost to GDP is likely to be reversed next quarter, even stripping that impact out, underlying growth remained on solid footing. This economic strength means the Federal Reserve is likely to continue raising short-term interest rates. The big question moving forward is how sustainable is this acceleration in GDP growth? As the tax cut benefit begins to fade over the next few quarters, at the same time that short-term interest rates likely creep higher –2018 may be “as good as it gets” for this economic cycle.