What Trade War? Real GDP Surges 4.1% on Exports and Consumer Spending

July 27, 2018

By Jeff Ferry, CPA Research Director

US gross domestic product (GDP), adjusted for inflation, grew by a 4.1% annual rate in the second quarter of this year, the fastest quarterly growth rate since 2014, showing that economic growth is surging ahead, unaffected by—or perhaps boosted by--trade actions by the Trump administration. 

According to government figures, the US economy was lifted by strong consumer spending and a surge in net exports in Q2. Consumer spending growth is likely due to the acceleration in the economy driven by tax cuts in the tax package passed by Congress late last year, as well as economic growth in key sectors like fossil fuels. That could easily continue throughout the year. The administration is forecasting 3.1% growth for this year, which if achieved will be the first above-3% annual growth figure for the US economy since 2005.

Strong growth in net exports, which included a 13% surge in goods exports in the April to June quarter, may slow down as the trade picture is complicated by international moves and counter-moves in trade. According to observers, foreigners rushed to stock up on certain US exports, like soybeans, ahead of moves by China to block US shipments of soybeans there. If Chinese retaliation bites in Q3, US exports could slow down. On the other hand, imports grew only 0.5% (annual rate) in Q2, its slowest rate since Q1 2016. The slowdown in imports could be due to actions taken by the Trump administration to restrict imports of commodities including steel and aluminum. With growing sentiment in the investment community that the Trump administration will go forward, perhaps in October, and impose 10% tariffs on another $200 billion of Chinese imports, importers may be starting to look for alternate sources of supply.

The tariffs may be contributing to growth this year. Two major steel companies, Nucor and Steel Dynamics, recently reported 20% revenue growth in the first half of this year and both cited expansion plans, Nucor in Arkansas and Steel Dynamics in Indiana. CPA members, many of them downstream users of steel, continue to report that business is strong with rising demand from end-users in oil and gas, construction, and public infrastructure.

Inflation continued to be very moderate in the quarter. The most closely watched inflation indicator, the personal consumption expenditure price index, fell to 1.8% in the quarter from 2.5% in Q1. Excluding the volatile food and energy categories, the index fell to 2.0% in the quarter from 2.2% last time. While low inflation is good from a macroeconomic management point of view, it also indicates that ordinary workers’ wages stubbornly refuse to increase, despite low unemployment figures and tales of worker shortages. This is likely due to the pressure of international competition on the US economy.


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