U.S. second-quarter GDP growth expected to top 4%
Wall Street -- and the White House -- eagerly await the release of GDP data on Friday that economists expect to top 4 percent. The last time the economy expanded at a comparable pace was in 2014, when growth hit 5.2 percent in the third quarter.
Granted, a single three-month period of rising output is a limited gauge of the economy's health. The quarterly figures are volatile and can swing sharply from quarter to quarter. But this year's second-quarter number will be more closely watched than usual, thanks to President Donald Trump's repeated pledge to hit annual growth of "much higher" than 3 percent.
The economy grew 2.3 percent in 2017, which is considered typical for the late stages of a post-recession recovery. GDP growth for a full year hasn't exceeded 3 percent in 14 years.
"You're going to get a GDP number on Friday that's going to be a very impressive number. Some people are in the 4 to 5 percent zone," Larry Kudlow, the White House economic adviser, told CBS This Morning.
Whether such robust growth is sustainable is another question. Here's what turbocharged the economy in the second quarter.
GOP tax cuts
The second-quarter figure will be widely seen as a referendum on the GOP tax cuts of late 2017. This quarter benefits from a timing sweet spot, coming after the deficit-busting cuts trickled through the economy, but before the effects of the White House's protectionist trade policies are fully felt.
GDP likely got a big boost from the additional tax-cut money going to both companies and consumers, economists say.
"When you drop taxes and increase spending, even if some of it is saved rather than spent, it boosts growth," said Jim O'Sullivan, chief economist at High Frequency Economics. "Ultimately, that boost won't last forever, and of course you've added to the government debt. But there's no question that it's stimulative."
The tax cuts' cornerstone was a permanent reduction in business tax rates, giving corporate profits an instant boost on paper. They would have been solid by mid-April, when corporations' first-quarter tax payments are due. Many workers, too, saw slightly larger paychecks in February or March, with higher-earning workers reaping bigger benefits.
Consumers come back
Consumer spending has continued to rise. Because it makes up about 70 percent of GDP, it's an important component for gauging overall growth.
"Retail sales have been really strong recently, up for five straight months, which is really kind of rare in this economy," said Ryan Detrick, senior market strategist at LPL Financial. "Consumer spending is a big reason the GDP number is expected to come in fairly strong."
For now, consumer confidence seems boosted by low unemployment, according to Morgan Stanley Research. "Consumption remains supported by a strong labor market and a lift to disposable income from the tax cuts, although some of these benefits are being eroded by rising gasoline prices," Morgan Stanley economists wrote in a note.
An "idiosyncratic" quarter
Not even bullish economists expect the pace of the second quarter's growth to continue, however, because it's driven by "a number of idiosyncratic factors that are unlikely to be sustained in the second half of the year," according to Morgan Stanley.
A major factor is the Trump administration's aggressive trade stance, which is starting to be felt in some sectors and is expected to be a slight drag on GDP. The timing of the tariffs, however, has been a short-term growth boost as exporters rushed to finish shipments ahead of tariff imposition dates.
"Anxiety around a global trade war has fueled a jump in U.S. exports ahead of tariffs," LPL Financial wrote in a note. The imposition of broad-based tariffs in early July created a deadline that many U.S. exporters raced to beat, as the narrowing trade deficit shows. "The increase in exports is primarily from increased demand as purchasers try to beat retaliatory tariffs, evidenced by soybeans and civilian aircrafts comprising almost all of the jump in exported goods in May," LPL Financial wrote.
While this boosts the second-quarter number, the increase is somewhat misleading, because it's essentially moving up activity that would have occurred later in the year.
"That's likely to be a one-time deal," said LPL Financial's Detrick. "We think the second half the year is likely to be around 3 percent [GDP growth]. The exports are going to be a wild card that's going to make this quarter stick out like a sore thumb."
Profit-shifting
As much as the tax cuts gave businesses and consumers more money to spend, they also likely created incentives for companies to reveal money they already had, Austan Goolsbee, the chairman of the Council of Economic Advisers under President Barack Obama, pointed out on Twitter.
We don’t know how much is just accounting shift due to the tax change (new lower rates encourage corps to “discover” profits in us that were previously counted as being elsewhere via transfer pricing). That has no real effect but raises measured GDP. https://t.co/rmDctKl1me
— Austan Goolsbee (@Austan_Goolsbee) July 25, 2018
Overcompensating?
A more prosaic reason that second-quarter GDP is likely to be high is just historical habit. For seven of the past 10 years, growth has been weaker than expected in the first three months of the year and much stronger than expected in the three months that followed. That pattern has been going on so long, it has likely had statistical effects on the government's initial estimates on GDP.
Typically, the Bureau of Economic Analysis, which issues the GDP number, revises its previous estimates once a year to account for additional data coming in. This year, the bureau promises a more comprehensive revision, making it likely that the first-quarter figure will be revised up.
"So history's going to get changed as well," High Frequency Economics' O'Sullivan said.