Gross domestic product (GDP) grew at a solid 4.1% pace in the second quarter, its best pace since 2014, according to CNBC. Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a period (quarterly or yearly) of time. Nominal GDP estimates are commonly used to determine the economic performance of a whole country or region, and to make international comparisons. Nominal GDP per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore using a basis of GDP per capita at purchasing power parity (PPP) is arguably more useful when comparing differences in living standards between different nations.
The second-quarter number matched expectations from economists surveyed by Reuters and was boosted by a surge in consumer spending and business investment. That’s the fastest rate of growth since the 4.9% in the third quarter of 2014 and the third-best growth rate since the Great Recession. In addition to the strong second quarter, the Commerce Department revised its first-quarter reading up from 2.0% to 2.2%.
However, policymakers at the Federal Reserve estimate that in the long run, the sustainable growth rate of the U.S. economy right now is about 1.8% per year. The Congressional Budget Office comes up with a similar estimate. A quarter or two of 4% growth, though, doesn’t say much about long-term trends.
Looking at the data for the second quarter, a jump in exports accounted for just over a percentage point of the second quarter’s 4.1% growth rate. While not all of that jump was tied to the tariffs, a lot of it probably was, including a surge in soybean exports as buyers tried to get out in front of the tariffs.
Undoubtedly, the recent tax law also benefited GDP growth. In December, for example, Goldman Sachs projected that the tax bill would add three-tenths of one percentage point to growth in the next two years. Most economists agree that the tax cuts gave the economy a temporary upward push in 2018. But they warn that it will have the effect of a sugar rush—pushing up GDP in the short run, but undermining growth over the longer term.
What is in store for GDP growth moving forward is perhaps shrouded in even more uncertainty than usual. Most economists expect a trade war to drag down economic growth around the world, although its impact will vary widely depending on the country and sector. However, the U.S., because it has such a large and diversified economy, is probably in a better position to withstand the disruption than other industrialized nations. Net exports were responsible for about a 1.1% increase in GDP last quarter—although a lot of that was offset by declines in inventories. The U.S. Department of Agriculture, for example, reported that China canceled $140 million in soybean contracts at the end of June.
A growing economy certainly is a boost to the stock market, but with a robust economy usually comes rising inflation. One concern the Federal Reserve has is that unemployment is well below the rate many economists consider sustainable in the long term. As the labor market tightens, wages usually increase to encourage workers to enter the workplace. These rising costs to companies are often passed on to consumers as higher prices for goods and services. At this time, however, there’s little evidence of an acceleration so far.
The Fed is trying to keep inflation under control by gradually raising interest rates. But tax cuts and increases in government spending are making the Fed’s job more difficult, as fiscal policy (which Congress controls) and monetary policy (which the Fed controls) are working at cross-purposes.
AAII Weekly Survey Question
When it comes to stock prices, two of its greatest enemies are slowing economic growth and inflation. Inflation—the rise in the price of goods and services—reduces the purchasing power each unit of currency can buy. Rising inflation leads to higher input prices, allows consumers to purchase fewer goods, lowers corporate revenue and profits and slows the economy.
While inflation can lead to an economic slowdown, it is not the sole cause. To get an idea of which our readers fear the most, last week’s survey question asked:
As an equity investor, are you more worried about rising inflation or slowing economic growth?
Here are the results:
In all, 1,488 readers participated.
By a slight majority—58% to 42%—our readers are more worried about slowing economic growth negatively impacting equities than rising inflation.
Weekly Special Question
As we mentioned earlier, U.S. GDP grew by 4.1% in the second quarter, its fastest rate since 2014. However, many economists and the U.S. government put “normal” growth at around 2%.
Last week’s special survey question wanted to see whether our readers see this above-normal growth persisting. Specifically, we asked:
How sustainable do you think the current economic expansion is? Why?
In all, we received 260 responses.
More than two-thirds (69%) of the responses stated that the current level of GDP growth is not sustainable.
The biggest reason readers cited for why the current GDP growth is unsustainable is the potential looming tariffs, especially those between the U.S. and China (29%).
Another 23% of this block believe last year’s corporate tax cuts are providing a fleeting boost to GDP growth.
Another reason voters cited for why the current GDP growth is unsustainable is because they feel the growth was “artificially” boosted by a spike of exports ahead of proposed tariffs (nearly 18%).
Nearly 10% of the group that believes the current growth in GDP will not last attributes an eventual slowdown to the mounting debt at the household, corporate and federal levels.
Only 7% of responses blamed rising interest rates as a reason why GDP growth will come down from current levels.
Six percent of those thinking the current level of GDP growth is unsustainable because they believe the Democrats will win control of both the House and Senate in the November midterm elections and enact or overturn policies that will hurt economic growth.
Among the 31% of responses that indicate the current level of GDP growth is sustainable, they believe the threat of a trade war will lead to more favorable terms for the U.S., which will boost economic activity as well as the lasting impact of deregulation and tax cuts that will continue to power the economy.
Here is a sampling of the responses we received as to whether readers believe the current level of GDP growth is sustainable:
- “As more tariffs are enacted, I believe we will experience a corresponding contraction of economic expansion leading to a recession.”
- “The current GDP growth is completely unsustainable. It is apparently due to tariff avoidance trade and tax cuts to companies.”
- “Depends on how trade negotiations go. If everybody decides to get rid of tariffs and implement free and fair trade the world will be a richer place, including the U.S. If the politicians decide to play games, all bets are off.”
- “I certainly do not think that 4%+ is sustainable. On the other hand, I do believe that rates in the 3%+ range are sustainable. I think the tax bill set in motion some things that will continue to contribute to increased growth, but the sudden lurch to 4%+ has seasonal factors that will not be repeated in future quarters.”
- “I do not think the second-quarter GDP economic expansion is sustainable. The current U.S. president will create enough turmoil from his proposed haphazard policies to slow GDP growth.”
- “I think it will continue and perhaps grow for a good period of time. The president is focused on the economy and knows what he is doing.”
- “If the Republicans hold the House and Senate in November, and Trump can continue his tax cutting and deregulation, then it’s very sustainable. Trade wars are a wild card but I still consider them a tool to force other countries to come to the table and negotiate more favorable trade terms.”
- “Unsustainable. Government and institutional debts—particularly state pensions—will force interest rates up, choking off growth potential.”
Everybody has an opinion! Why not give us yours? Participate in our weekly member poll, updated every Monday, and see the results online at www.aaii.com/memberquestion.