Real gross domestic product (GDP) grew 4.1% in the second quarter, slightly below consensus expectations for 4.2% growth. However, as our LPL Chart of the Day shows, the print was one of the highest of the business cycle thanks to boosts from new tax policies and a glut of exports on top of a solidly improving economy.
“Second-quarter GDP came in strong at 4.1%,” while marking the best reading since 2014, according to John Lynch, LPL’s Chief Investment Strategist. “We expect that fiscal stimulus will continue to prevail over tariffs and oil prices this year, potentially boosting U.S. economic growth to its highest point of the cycle.”
The quarter was marked by a solid rebound in consumer spending following first quarter weakness and continued strength in business spending. While we continue to expect solid growth throughout 2018, we believe the second quarter numbers were boosted by temporary factors that may act as a headwind looking forward. In particular, growth got a boost from a significant jump in exports as purchasers rushed to beat retaliatory tariffs, evidenced by soybeans and civilian aircrafts comprising almost all of the jump in exported goods in May. Net exports accounted for 26% of second-quarter GDP growth, its biggest contribution since 2013. This effect is likely to reverse in future quarters as the negative economic impact of tariffs emerges. A strong dollar may further weigh on exports because it makes U.S. goods more expensive abroad. Overall, we estimate that tariffs will cause a 0.1% to 0.2% drag on GDP annually if they do not extend meaningfully beyond current conversations.
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 grew at an annualized rate of 3.1% over the first half of the year, so growth could slow slightly to 2.9% over the second half of the year and still hit 3% for the calendar year. Even 2.9% growth would be an upbeat number compared to the expansion average of 2.3%.
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