Tax cuts and government spending are adding to the already strong economy, making the United States its best year for over a decade.
The Commerce Department reported Friday that gross domestic product, the largest amount of goods and services produced in the economy, grew 4.1 percent in the second quarter. Consumers led the way by shaking off higher gasoline prices and sluggish wage growth to increase spending on anything from cars to clothing to restaurant meals.
President Trump welcomed the data as evidence that his policies worked on trade, taxes and other issues. Robust growth is good news for Republicans, who are counting on the economy to help them with the midterm elections this fall.
"Once again we are the economic envy of the whole world," said Trump outside the southern portico of the White House, flanked by his top economic advisors.
Economists point out that the recent acceleration, which is good news for American companies and households in the short term, is not sustainable in the long run and could increase the risk of a recovery in the coming years.
The quarterly figures have been beefed up by a number of unique factors that will not be repeated. Most forecasters predict that growth will slow in the second half of the year – even without the possibility of a trade war that has been described by senior executives as a source of uncertainty in recent weeks that might force them to adopt hiring and investment plans. 19659002] But it is little question that this spring was a highlight in the recovery from the recession that took place a decade ago.
The unemployment rate, which stood at 10 percent, has dropped to 4 percent. Job growth is at record levels. American factories, a focus for Mr. Trump, are at the highest rate in two decades. And second-quarter performance – the best quarter since 2014 – was met or exceeded in just four quarters during the Obama administration's eight years.
The underlying growth rates have been robust, and economists say that it is becoming increasingly likely that annual growth in gross domestic product could reach 3 percent in 2018 for the first time in the nearly decade-long rebound.
"On balance, the economy is doing better," said Diane Swonk, chief economist at The Auditing Firm Grant Thornton
Grote Company, a food processing equipment manufacturer in Columbus, Ohio, says Bob Grote says the business is the manager of the company, "fantastic".
"Everyone I talk to In the last few years, we literally have banner years," he said. "I see no end in sight."
Mr. Grote said he benefits from different trends. Confident consumers are eating more, leading to greater demand for pepperoni slicers, bread slicers, and sandwich makers that Grote manufactures. The tense labor market makes it difficult for food companies to hire workers, which increases the demand for automated equipment. And the tax cuts that were passed last year have encouraged customers to invest in equipment – and have caused Grote to do the same and postpone the projects scheduled for 2019 or 2020 until today.
"We spent more on capital goods year than we've probably combined in the last five years," said Mr. Grote. "We will see the benefits much sooner."
That's exactly the kind of investment the tax law should promote. So far, however, there is little evidence that companies are largely reinvesting their tax savings. The company's equipment investments have grown more slowly in the first half of the year and many companies are choosing to pay out dividends and buy back shares instead.
"Business spending does not pick up as proponents of tax cuts hoped," said Michael Gapen, chief economist of the United States for Barclays.
Instead, tax cuts seem to encourage consumer spending, which rose 4 percent in the spring quarter The largest increase since 2014. Increased federal expenditure – the result of a two-year budget agreement passed by Congress this year, also buoying the economy and helping to boost GDP growth by 2 to 2.5 percent, where there is much of it
Whether this policy is a good idea is another question – many economists doubt that it makes sense to adopt a deficit-funded stimulus package when unemployment is low and the economy is strong Few outside the White House believe that a 4 percent growth rate lingers in the long term tiger, partly because the aging baby boom generation accounts for a shrinking share of the American population.
Times like this should prepare you for the future and fix your financial center, and we'll do the opposite, "said Michael A. Peterson, chairman of the Peter G. Peterson Foundation, which has long argued for reducing the federal government Deficit
Tax cuts and spending increases could be challenging for Federal Reserve monetary policy makers, and the Fed seeks to strike a delicate balance by gradually raising interest rates to keep inflation in check without slowing recovery If the growth rate continues in the second quarter, it could push up inflation and cause the Fed to raise interest rates more quickly, which in turn could cause a recession.
However, there is little evidence that this will happen. Inflation slowed slightly in the second quarter, and the Friday report is likely to see the B do not persuade officials to deviate from their gradual and carefully planned march towards higher interest rates. The central bank is on track to raise interest rates twice this year, after two increases in the first half of the year.
The more immediate risk could be the possibility of a trade war. Mr. Trump has set tariffs on imports of billions of dollars from China, the European Union and other countries. The trading partners reacted to this with retaliatory tariffs, and both sides threatened more.
Tensions with Europe seemed to ease this week as Trump and Jean-Claude Juncker, president of the European Commission, agreed to work on a trade agreement. But the permanence of this ceasefire is unclear, and relations with China remain tense.
The friction in commerce, however, has yet to dampen entrepreneurs' confidence, let alone change their behavior. Over the past few weeks, teleconferents have said executives are fully aware of tariff announcements, and companies like General Electric, Whirlpool, and United Technologies have said tariffs increase costs or make a profit. However, only a few stated that they were hiring or hiring projects.
"You hear some precautions, but nothing specific about pullbacks," said Bill Warlick, an analyst at Fitch, the rating agency. Big companies, he said, make big investment decisions years in advance and will be slow to change course.
In the short term, trade tensions can contribute to growth by causing foreign buyers to stock American products before their governments impose retaliatory tariffs. In particular, soybean exports rose by more than 50 percent in May compared to the previous year.
Overall, exports rose 9.3 percent in the second quarter, accounting for a quarter of the total G.D.P. out. Growth. But the trend is unlikely to continue: exports are likely to plummet in the third and fourth quarters, totaling G.D.P.
"We do not want to overburden the strength of the economy in the face of the real risks posed by policy decisions," said Joe Brusuelas, Chief Accountant of RSM US
Mr. Brusuelas, "It is undeniable that the Things are better economically. "
Follow Ben Casselman on Twitter: @bencasselman .
Mark Landler and Jim Tankersley contributed reports.