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Economic Growth Will Linger in 'Solid' 3 Percent Range Rest of Year

Economic Growth Will Linger in 'Solid' 3 Percent Range Rest of Year
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Friday, 27 July 2018 11:55 AM Current | Bio | Archive

INDICATOR: Second Quarter GDP and July Consumer Sentiment

KEY DATA: GDP: 4.1%; Consumption: 4%; Business Investment: 5.4%; Consumer Prices (Quarterly): 1.8%; Over-Year: +2.8%/ Sentiment: down 0.3 point

IN A NUTSHELL: “The economy surged in the spring, led by business and consumer spending.”

WHAT IT MEANS: As expected, we got a big number for second quarter growth. The pace was the fastest since mid 2014, when second quarter growth was 5.1% and the third quarter expanded at a 4.9% rate. Most importantly, the gains were broad based. Consumers spent like crazy, especially on durable goods. Businesses also invested, especially on new buildings. A surprisingly large reduction in inventories restrained growth and that may have to be rebuilt going forward. Final sales to private domestic purchasers, a proxy for non-government, non-foreign demand, were up robustly as well. Export growth surged, likely in order to get ahead of the trade war and federal government spending ballooned. While the federal government tended to subtract from growth during the first half of the decade, it is now helping lead the way forward. On the inflation front, consumer price gains eased over the quarter, though it did accelerate when looking at the year-over-year numbers. The Fed considers both numbers when it evaluates what is happening to inflation.

One more sign that consumers will keep spending came from the University of Michigan’s July Consumer Sentiment Index release. The index fell minimally, which was surprising given all the trade war news. Indeed, it was reported that the share of respondents indicating that tariffs would have a negative impact surged in July and it was across all political groups, not just Democrats. It is hardly clear, though, that those fears will actually translate into changes in spending habits. I doubt it.

MARKETS AND FED POLICY IMPLICATIONS: This was a strong number that probably disappointed those who were looking for a number well above 4.5% - and many were. For those, I suggest chilling. The data will be revised, though I would not be surprised if the next number isn’t a little less robust. The huge increase in exports, which added greatly to growth, may not have been sustained in June and the June numbers were largely unavailable when this report was created. We get the June trade report at the end of next week. Looking forward, consumer spending will likely be good but not nearly as strong as in the second quarter. If the reports from the vehicle makers are to be believed, sales may be softening. (The July numbers come out next week.) With confidence high, the slowdown is not likely to be great. However, there is room for business spending to increase faster, especially on machinery, intellectual property and inventory rebuilding. On the trade front, it is all about the farmers and whether they can sustain their exports. Soybean exports exploded in the spring, as sellers tried to get things out to beat the trade war, and that could turn down sharply this quarter, slowing growth significantly. Other agricultural product sales may also have been curtailed. Putting it all together, the spring quarter could be the high water mark for growth. That said, there is every reason to expect that growth in the second half of the year will still be in the 3% range, a very solid pace. Investors should be happy but not exuberant over this report. It contains good news and some cautionary data. As for the Fed, inflation is not accelerating sharply and growth is strong but maybe not sustainable. I expect the Fed to raise rates again in September and if third quarter growth is in the 3% range, as I have, it is likely to hike again in December, especially if the strong growth causes inflation to continue to slowly accelerate.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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There is every reason to expect that growth in the second half of the year will still be in the 3% range, a very solid pace.
economy, growth, gdp, three percent, solid
Friday, 27 July 2018 11:55 AM
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