The Strategist

US GDP shows the fastest growth in almost four years

08/06/2018 - 12:42

The American economy has shown the fastest growth in nearly four years. According to preliminary estimates of the US Department of Commerce, GDP grew by 4.1% year-on-year in the second quarter, the highest since the third quarter of 2014, when it was 4.9%. In the first quarter, GDP grew by 2.2%.

jnn1776 via flickr
jnn1776 via flickr
Economists surveyed by The Wall Street Journal (WSJ), on the average, expected growth of 4.4%. Some gave higher ratings, for example Macroeconomic Advisers (4.5%), Barclays (5.2%). JPMorgan Chase reduced the forecast from 4.4 to 3.9% after the government published a number of economic reports.

The main components of GDP - consumer spending, exports, corporate investment, government spending - have shown strong performance. Contribution of exports, which grew by 9.3%, was particularly significant; as imports increased by only 0.5%, the contribution of foreign trade in quarterly growth was 1.06 percentage points (p.p.). This, however, is partly explained by attempts of companies to have time to deliver products before the import duties, that US trading partners introduced in response to similar measures by Washington, enter in force. Earlier in July, the US Department of Commerce reported that exports of soybeans rose sharply in the second quarter. Beans became one of the main articles of US exports, on which China introduced 25% duties in early July, and Chinese buyers were eager to import soybeans before the restrictive measures began. The data on export growth in the second quarter is distorted by 80% jump in the annual calculation of food, feed and drink supplies. This is mainly explained by a significant increase in the export of soybeans and corn to avoid duties, says Paul Ashworth, chief economist for US Capital Economics.

President Donald Trump, who promised to accelerate the growth to more than 3%, broke the tradition of Presidents and commented on the data prior to its official publication. "Some actually predicted 5.3 [% growth in the second quarter]," he said at a meeting with metallurgical workers in Illinois. - I do not think that it will be so – 5.3. If there is 4, we will be satisfied. If 3 with something – 3.8, 3.9, 3.7, for us it okay."

Rapid economic growth means that the Federal Reserve System (FRS) is likely to continue raising interest rates to prevent its overheating, says WSJ. The Fed has twice raised them in the first half of the year and made it clear that it intends to tighten monetary policy two more times this year and three - in the next. Analysts and market participants expect the Fed will raise them by 0.25 pp to 2-2.25% in September. "All inflation figures are in line with the Federal Reserve's objective of 2% or more... We are waiting for rates to increase in September and December and, possibly, a more stringent statement of intent at the meeting on Wednesday," wrote ING chief international economist James Knightley.

"This economic recovery is of historical significance," Trump said on Friday, adding that business confidence has reached "historic heights." Yet, many economists do not expect such a high growth rate to continue. Analysts Interviewed by the WSJ expect a slowdown to 3% in the third quarter and to 2.9% in the fourth quarter.

The tax reform, involving a tax cut of $ 1.5 trillion, supported financial performance of companies in the first half of the year, freeing up funds for investment, among others. However, the capital expenditures of the business for equipment increased slightly in the second quarter, by 3.9% after the growth by 8.5% a quarter earlier. Now, many companies are warning of an increase in costs and a decrease in the rate of profit thanks to duties imposed by Trump. General Motors, Ford Motor and Fiat Chrysler Automobiles lowered their forecasts for the annual profit, citing duties on steel and aluminum. This factor and the EU response 25% can cost Harley-Davidson $ 45-55 million, the company reported earlier (Ford reported $ 500-600 million, General Electric - about $ 300-400 million). Coca-Cola raises prices to compensate for 25% duties on aluminum and increased transportation costs, the company’s general director James Quincey said on Thursday. The same was announced by the manufacturer of household appliances Whirlpool. The tone of the statements of top managers has changed dramatically compared to their performances since the first quarter, when they focused on the benefits of tax reform, the Financial Times said.