U.S. real GDP increased at a seasonally adjusted annual rate of 4.1% in the second quarter as compared with only 2.2% growth in the first. The price index for GDP increased 2.3% in the second quarter, and nominal GDP expanded by 7.4%, also considerably faster than the Q1 growth rate.
A 4% expansion of consumer spending in Q2 was the main source of growth in the second quarter, as it contributed 2.69 percentage points to total GDP growth rate. The rebound in consumer spending was more powerful than expected in Q2 and speaks to the impact of an increasingly tight labour market and strong job growth on consumer income and household confidence.
Despite the focus on trade deficits hurting the economy by the Trump Administration, net exports added 1.06 percentage points to total GDP growth in Q2.
Among other notable developments in the second quarter, non-residential investment expanded at a strong 7.3% annual rate, but residential construction contracted for the second quarter in a row. Residential construction declined at a 1.1% annual rate in Q2 compared with a 3.4% decline in the first quarter.
The 4.1% GDP growth rate in Q2 was the strongest since the third quarter of 2014 and thus the economy has a strong headwind going in the third quarter.
Nonetheless, the recent strong pace is clearly not sustainable into next year for several reasons. Among them, the impact of the huge tax cut will start diminishing next year, the recent large boost from net trade represented an unusual “pre-tariff” reaction to the fear of a trade war, and finally, a weaker housing construction market will also weigh on economic activity in the second-half of 2018.
Nevertheless, the latest robust report makes it highly likely the Federal Reserve will continue gradually raising short-term interest rates to prevent the economy from overheating. The Fed has already raised rates twice this year and has signalled that it could raise rates two more times in 2018 and three in 2019.
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