Real GDP Growth Rebounds Sharply in the Second Quarter

By Robert Hughes

Real gross domestic product rose at a 4.1 percent annualized rate in the second quarter, up from a revised 2.2 percent pace in the first quarter of 2018, according to the Bureau of Economic Analysis. Growth was driven by strong gains in consumer spending, business investment, exports, and government spending. Consumer-price increases decelerated in the second quarter versus the prior quarter. Overall, the very solid report suggests the U.S. economic expansion remains healthy.

Consumer spending accelerated sharply in the second quarter, rising at a robust 4.0 percent pace compared to a 0.5 percent growth rate in the first quarter. The acceleration was broad-based across the major segments of consumer spending, with durable-goods spending rising 9.3 percent, nondurable-goods spending up 4.2 percent, and services gaining 3.1 percent. Consumer spending contributed 2.7 percentage points of the 4.1 percent real GDP growth rate versus just 0.4 percentage points in the first quarter.

Business investment rose at a 7.3 percent annualized rate in the second quarter of 2018, slower than the 11.5 percent pace of the first quarter. At annualized rates, the gain was led by a 13.3 percent surge in spending on structures, while spending on equipment rose 3.9 percent and intellectual property investment rose 8.2 percent. Real business investment contributed 1.0 percentage points to overall real GDP growth versus a 1.5 percentage-point contribution in the first quarter.

Residential investment, or housing, fell at a 1.1 percent pace in the second quarter compared to a 3.4 percent decline in the prior quarter. Altogether, business and residential investment grew at a 5.4 percent pace in the first quarter, contributing 0.9 percentage points to total GDP growth compared to a 1.3 percentage-point contribution in the first quarter. Inventory liquidation by businesses subtracted 1.0 percentage points from second-quarter growth after adding 0.3 percentage points in the prior quarter.

Net exports had a positive impact on overall GDP growth in the first quarter, adding 1.1 percentage points. Exports rose at a robust 9.3 percent pace while imports grew at a substantially slower 0.5 percent rate, below the 3.0 percent pace in the prior quarter.

Government spending rose at a 2.1 percent annualized rate in the second quarter compared to a 1.5 percent increase in the first quarter, contributing 0.4 percentage points to growth versus a 0.3 point contribution in the prior quarter.

Real final sales to private domestic purchasers, a key measure of private domestic demand, rose at a very impressive 4.3 percent annualized rate in the second quarter, up from a 2.0 percent pace in the first quarter (see chart). The second-quarter gain was the second time in the past three quarters that growth exceeded 4 percent and the fifth time over the past nine quarters that growth exceeded 3 percent. Over the past four quarters, real private domestic demand is up at a healthy 3.2 percent rate, slightly above the 2.9 percent gain for the four quarters ending with first-quarter 2018.

The underlying trend in real private domestic demand remains well-supported by continued job creation, rising wages, healthy corporate and consumer balance sheets, solid corporate-sales and corporate-earnings growth, and high levels of business and consumer confidence. The virtuous cycle between the consumer and corporate sectors is likely to provide ongoing support for further gains in real private domestic demand, suggesting continued economic expansion in the months and quarters ahead. The positive outlook is further support by the results of the AIER Leading Indicators index, which scored a very healthy 92 in June.

On the prices side, consumer prices — the personal-consumption price index — rose at a 1.8 percent pace in the second quarter, slower than the 2.5 percent pace in the first quarter. Over the past four quarters, the increase is 2.2 percent. For core consumer prices, which exclude volatile food and energy components, the index rose 2.0 percent, down from 2.2 percent in the prior quarter. Over the last four quarters, core consumer prices rose 1.9 percent. Core consumer-price increases have been slowly drifting higher over the past several quarters but appear unlikely to accelerate dramatically in the quarters ahead.

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.