Second Quarter GDP Preview: Fiscal Stimulus May Fuel Strongest Growth Since 2014

After a seasonally weak first quarter, expectations have been ramping up for the U.S. economy. The first look at real gross domestic product (GDP) for the second quarter will be released on Friday, July 27, and according to consensus expectations, it could be the strongest reading since 2014.

We agree that the stage is set for a strong second quarter GDP report. As shown in our LPL Chart of the Day, the U.S. economy last quarter likely benefited from a potent mix of accommodative fiscal policy, the solid macroeconomic backdrop, and a narrowing trade deficit amid a glut of exports.

“The benefits of fiscal stimulus on consumer and business spending, combined with a tailwind from exports, should contribute to a strong second quarter GDP print,” according to John Lynch, LPL Research’s Chief Investment Strategist. “We expect fiscal stimulus to prevail over tariffs and oil prices this year, boosting U.S. economic growth to up to 3%.”

Consumer spending, which accounts for about 70% of the economy, has improved in the second quarter after weak first quarter reports. Business spending has been accelerating since an oil-related slowdown in 2015 and early 2016, and posted some of its strongest growth in the cycle in the first quarter.

U.S. exports have also increased significantly due to higher demand ahead of tariffs, which has closed the trade deficit to its smallest gap since 2016. The Atlanta Federal Reserve’s NowCast model estimates that net exports may account for 0.7% of their 4.5% GDP growth forecast for the second quarter, which would be its strongest contribution since 2013 if realized.

However, the positive impact on GDP from the increase in exports may just be borrowing growth from future quarters. We estimate that tariffs would cause a 0.1% to 0.2% drag on GDP annually if they do not extend meaningfully beyond concrete proposals.

As we noted in our Midyear Outlook 2018 publication, we expect U.S. GDP growth of up to 3% in 2018. Year-over-year GDP growth was 2.8% in the first quarter, so our target range implies a modest lift from current levels. We expect that the benefits of fiscal stimulus may outweigh any negative implications of tariffs and the economy should be able to maintain a solid growth trajectory over the remainder of the year.

IMPORTANT DISCLOSURES

GDP projections cited above are from the Federal Reserve Bank of Atlanta’s NowCast Model (as of 7/18/2018).

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