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Tax cuts and federal spending add fuel to the already strong economy, giving the US a pace for their best year of growth for more than a decade.
The largest measure of goods and services produced in the economy grew by 4.1% in the second quarter of the year. Consumers have led the way by ignoring rising gasoline prices and sluggish wage growth to boost spending on everything from cars to clothes to restaurant meals.
President Trump of other problems worked. Strong growth is good news for Republicans, who rely on the economy to help them in the mid-term elections this fall.
"Once again, we are the economic envy of the whole world" the White House, flanked by its best economic advisers
Economists warn that the latest acceleration, although it is a good news for US businesses and households in the short term, is not sustainable in the long run and could increase the risk of recovery in the coming years.
The quarter's numbers have been inflated by a series of one-off factors that are unlikely to recur. Most forecasters expect growth to cool in the second half of the year – even ignoring the possibility of a trade war, which business leaders recently described as a source of uncertainty. which could force them to limit their hiring and investments. 19659002] But there is no doubt that this spring was a highlight of the rebound of the recession that struck ten years ago.
[ Watch : Ben Casselman Answers the Questions of Viewers on GDP Growth.]
The unemployment rate, which reached 10%, fell to 4%. Employment growth is on a record run. American factories, a priority for Trump, are hiring at their fastest pace in two decades. And the second quarter performance – the best quarterly performance since 2014 – has been matched or surpassed in just four quarters over the eight years of the Obama administration.
Underlying growth measures were robust and economists say that it is increasingly likely that year-on-year growth in gross domestic product could reach 3% in 2018 for the first time in the recovery of almost ten years.
"The bottom line is that the economy is doing better," said Diane Swonk, chief economist for The Grant Thornton Public Accountants
At Grote Company, a manufacturer From food processing equipment in Columbus, Ohio, the business is "extraordinary," according to Bob Grote, the company's general manager. has literally had banner years in recent years, "he said." I see no end in sight at the moment. "
Grote said he enjoyed several trends. Confident consumers eat more, resulting in increased demand for Grote's pepperoni slicers, bread cutters and sandwich assembly equipment.The tight labor market makes it harder to hire workers through Food businesses, which creates a greater demand for automated equipment.And the tax cuts passed last year have encouraged customers to invest in equipment – and have brought Grote to do the same, moving the planned projects for 2019 or 2020 until today.
"We have spent more in equipment year than we probably have in the last five combined", has said Mr. Grote . "We will see the benefits much sooner."
This is exactly the kind of investment that the tax law was supposed to encourage. Until now, however, there is little evidence that companies are largely reinvesting their tax savings. Business investment in equipment grew more slowly in the first half, and many companies choose to pay dividends and buy back shares.
"Business spending is not progressing as had hoped supporters of tax cuts," said Michael Gapen, chief economist of the United States for Barclays.
Instead of this, the tax cuts seem to encourage consumer spending, which rose 4 percent in the spring, the biggest increase since a two-year budget agreement passed by Congress this year – also gives a boost to inch to the economy, thus helping boost GDP growth from the rut of 2 to 2.5 percent where he spent much of the recovery.
If these policies are a good idea Another question: Many economists question the desirability of passing what constitutes a deficit-financed stimulus package when unemployment is low and the economy is strong. Rare are those who, on the outside in the White House, believe that a growth rate of 4% is sustainable in the long term, partly because the aging of the baby boomers means that the share of the American population is decreasing
. Moments like this should prepare the future and put our finances in order, and we really do the opposite, "said Michael A. Peterson, president of the Peter G. Peterson Foundation, which has long advocated for a reduction in federal taxes.
For Federal Reserve policymakers, tax cuts and increases in spending could be a problem in the shorter term. The Fed has tried to find a delicate balance, gradually increasing interest rates in an effort to contain inflation without stifling the recovery. If the second quarter growth rate continues, it could risk accelerating inflation and prompting the Fed to increase rates faster. This, in turn, could cause a recession.
There is little to suggest that this will happen, however. Inflation has slowed slightly in the second quarter, and Friday's report should not convince the authorities to move away from their gradual and carefully crafted move towards higher interest rates. The central bank is on track to raise rates twice this year, following two increases in the first half of the year.
The most immediate risk is the possibility of a trade war. Mr Trump has imposed duties on billions of dollars worth of imports from China, the European Union and other countries. Business partners responded by imposing retaliatory tariffs, and both parties threatened further.
Tensions with Europe seemed to ease this week when Trump and Jean-Claude Juncker, President of the European Commission, agreed to work. towards a commercial agreement. But the sustainability of this truce is unclear, and relations with China remain tense.
Trade frictions have not yet cooled the confidence of business leaders, let alone led them to change their behavior. In conference calls in recent weeks, executives said they were closely monitoring tariff announcements, and companies like General Electric, Whirlpool, and United Technologies have said that rates increase costs or reduce profits. Few people however said that they slowed down the hiring or cancellation of projects.
"You hear cautionary notes, but nothing specific about withdrawals," said Bill Warlick, an analyst at Fitch, the rating agency. Large companies, he says, are making major investment decisions years in advance and will be late to change course
In the short term, trade tensions could contribute to growth by prompting buyers foreigners to supply US products before their governments impose. retaliatory tariffs. Soybean exports, in particular, increased by more than 50% in May compared with the previous year (19659028). growth. But the trend is unlikely to last: exports will almost certainly collapse in the third and fourth quarters, and will affect the entire G.D.P. "We do not want to overexpose the strength of the economy given the real risks that are put in place by the policy choices," said Joe Brusuelas, chief economist at the RSM US accounting firm [19659002] said, Mr. Brusuelas added, "it is undeniable that things are better economically."
Follow Ben Casselman on Twitter: @bencasselman .
Mark Landler and Jim Tankersley contributed
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