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US 4% Q2 growth seen as more 'luck of the draw' than new reality


THE US economy may have hit 4 per cent growth in the second quarter, the fastest since 2014 and a feat President Donald Trump will tout as a sign of his success. It's more like a winning hand that doesn't come up often.

Gross domestic product expanded at a 4.3 per cent annualised rate in the April-June period, according to the Bloomberg survey median, with forecasts ranging as high as 5.4 per cent. The stars were aligned following 2 per cent growth in the first quarter: The biggest tax overhaul since the Reagan era delivered another boost to consumer spending and business investment, and the volatile categories of inventories and trade probably juiced the number - helped by a likely temporary jump in soyabean exports ahead of retaliatory tariffs.

While there's much to like about the economy right now, analysts reckon the confluence of positive forces will give way to solid, albeit less spectacular, numbers in the second half and beyond as the tax stimulus begins to fade, the Federal Reserve raises borrowing costs further and the expansion ages. The burgeoning risk from tariff wars makes it even more unlikely that the torrid second-quarter performance is a new normal.

"It is just the luck of the draw," said Gus Faucher, chief economist at PNC Financial Services Group Inc in Pittsburgh. "In the second quarter, we had a lot of components adding to growth." While "the economy is in good shape", the projected surge is "temporary" and "the result of the fiscal stimulus", he said. "It's not a 4 per cent economy." The GDP report, due from the Commerce Department on Friday in Washington, will also include comprehensive revisions to decades of data. Beyond the headline number, the scorecard will probably be less of a barnburner.

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Economists looking for a better sense of underlying demand typically exclude volatile components from the GDP calculations. One gauge that eliminates trade, inventories, and government outlays - final sales to private domestic purchasers - probably grew around or slightly above the average 2.8 per cent pace for this expansion, rather than being a blowout.

Mr Faucher forecasts a 3.2 per cent gain for that measure of underlying demand with headline GDP growth of 4.1 per cent. Gregory Daco of Oxford Economics sees final private domestic sales rising 2.7 per cent, alongside a 4.5 per cent GDP gain that "is unlikely to be repeated later this year". "I don't think the longer-run picture has changed much," PNC's Mr Faucher said. Post-stimulus, "we're back in a 2 per cent world". Overall GDP growth has averaged 2.2 per cent since the recession ended in mid-2009.

The second-quarter projections would bring the first-half pace to 3 per cent, matching Mr Trump's long-run goal. Administration officials are already taking victory laps. White House economic adviser Larry Kudlow said last week that the economy is starting to grow 4 to 5 per cent and others will copy the nation.

For now, the fiscal stimulus is adding steam to an economy that's already come a long way in the nine years of this expansion and is poised to surpass US$20 trillion in nominal dollars. Unemployment near the lowest level since 1969, steady hiring and low inflation also are bolstering consumption, which accounts for about 70 per cent of GDP. Lower taxes and still-easy monetary policy are supporting investment and buoying corporate profits. That's helped put a floor under the stock market even as tariff threats cloud the outlook for growth and inflation. Besides, the US also is the brightest spot among developed economies, offering a tailwind to the dollar, whose strength Mr Trump said on Friday is hurting the country.

Even so, the president is counting on keeping growth going at full swing as he escalates the trade war with China, the European Union, Canada and Mexico. Rates on benchmark 10-year Treasuries reflect the challenge. The flattening yield curve signals investors are sceptical that the economy can handle much higher rates from the Fed.

A more immediate concern is the twists and turns on tariffs, which are generating bad-news headlines of how higher import costs are hurting goods producers and overshadowing the mileage the administration could have drawn from Mr Trump's tax initiative. Americans' sentiment is cooling, though still elevated enough to support spending. If the uncertainty persists, corporate America may slow capital spending, which revved up in recent quarters as a second pillar of growth in addition to consumer purchases. BLOOMBERG

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