In the last several days, the big news out of Washington - and echoed by Wall Street - was the U.S. economy grew at a whopping 4.1% rate in second quarter. This is astonishing progress when we consider that it grew at only 2.2% in the first quarter, revised upwards from the 2.0% originally reported, which is the fastest pace in nearly four years this spring. As I have said many times before, it reflects broad-based momentum that suggests the second-longest expansion on record isn’t yet running out of fuel.
As has been widely reported in the business press, robust consumer spending, solid business investment, surging exports and increased government outlays were among the factors that boosted gross domestic product- the value of all goods and services produced across the economy. While some of the growth came from a burst of exports that some analysts warned could be a temporary response to looming trade tariffs, the details of the report suggest underlying strength that could tee up one of the best years in the current expansion, which began in 2009. A key measure of business spending moderated from the first quarter but remained robust, as non-residential fixed investment, reflecting spending on commercial construction, equipment and intellectual property products such as software, rose at a 7.3% rate after rising 11.5% in the first quarter. The 2017 tax overhaul was designed to encourage such investments by lowering the corporate tax rate and by letting companies immediately deduct certain capital expenditures instead of depreciating them over time. Output rose 2.8% in the second quarter from the same period of 2017, and Fed officials expect to see growth hit the same pace in the fourth quarter of this year from a year earlier, which would mark the best calendar year since 2005.
After stripping out the volatile categories of trade, inventories and government spending, sales to private domestic buyers rose at an annual rate of 4.3%, even better than the overall GDP number. The report makes it highly likely the Federal Reserve will continue to gradually raise short-term interest rates to prevent the economy from overheating. Trade also contributed strongly to the economy’s performance. Net exports added 1.06 percentage points to the second quarter’s 4.1% GDP growth rate, which likely reflected a surge in soybean exports as buyers abroad rushed to get their supplies before China’s 25% retaliatory tariffs on the U.S. crop hit in July.
Consumers ramped up their spending at a robust 4% annual pace in the second quarter, buoyed by low unemployment, steady job growth and recent tax cuts. But as Americans spent more, however, they saved less, with the personal saving rate at 6.8% in the period, down from 7.2% in the first three months of the year. And some economists saw a potential warning signal for future spending, as consumer sentiment cooled in July, continuing to moderate from the 14-year high the consumer sentiment index touched earlier this year. Others shrugged off the suggestion, noting that trade barriers are causing anxiety, and expect this concern will pass as the inevitable trade deals are made between the U.S., China and Western Europe.
Why is the economy enjoying such a long, sustained tailwind? Well, growth has been lackluster during the current expansion compared with its recent predecessors; from the second quarter of 2009 through the second quarter of this year, GDP increased at an average annual rate of 2.3%, below the 2.9% rate during the 2001-07 expansion and the 3.6% rate from 1991 to 2001. This slow recovery has expanded the length of the current recovery cycle.
Strong GDP means a strong U.S. economy, which bodes well for the construction industry in general, and ready-mixed concrete production in particular.