Consumers, soybeans seen powering U.S. second-quarter
growth
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[July 27, 2018]
By Lucia Mutikani
WASHINGTON (Reuters) - The U.S. economy
likely grew at its fastest pace in four years in the second quarter as
consumers boosted spending and farmers rushed shipments of soybeans to
China to beat retaliatory trade tariffs before they took effect in early
July.
Gross domestic product probably increased at a 4.1 percent annualized
rate, also as business stockpiled inventory ahead of the impending
import duties, according to a Reuters survey of economists. That would
be strongest performance since the third quarter of 2014 and put the
economy on track to achieve the Trump administration's target of 3
percent annual growth.
Ahead of Friday's release, President Donald Trump and members of his
economic team have been promoting the notion that second-quarter growth
will be robust. Earlier in the week he tweeted that the United States
has "the best financial numbers on the planet."
Along with its snapshot of second-quarter GDP growth, the report will
likely include a revision of the first quarter's growth estimate of a
2.0 percent rate as the government will also publish comprehensive
revisions to prior GDP data.
"Ironically, the threat of a trade war appears to have bolstered
activity in the second quarter," said Michelle Girard, chief economist
at NatWest Market in Stamford, Connecticut.
The United States slapped 25 percent duties on $34 billion worth of
Chinese goods effective July 6, provoking a similar response from
Beijing, which targeted soybeans and other agricultural products as well
as U.S.-made cars.
Trump has also imposed tariffs on steel and aluminum imports, leading to
retaliation by the United States' main trade partners, including Canada,
the European Union, Mexico and China. There was also a front-loading of
exports of other goods in the second quarter.
With the trade-related boost expected to unwind in the second half of
the year, economists caution against putting much weight on the
April-June quarter growth. Excluding the tariffs-related bump, analysts
estimate the economy probably grew at a 2.5 percent pace in the second
quarter.
"The real issue is what is the underlying strength and what is
temporary," said Sung Won Sohn, chief economist at SS Economics in Los
Angeles. "Going forward it's quite likely that we could see economic
growth slowing from this sizzling rate in the second quarter."
The economy will this year be supported by a $1.5 trillion tax cut
package and increased government spending in the last quarter. But the
stimulus is expected to fade sometime next year. The import duties are
seen undercutting economic growth, with higher prices for goods
discouraging consumer spending and businesses shelving investment plans.
For now, strong growth in the second quarter will keep the Federal
Reserve on course to raise interest rates two more times this year. The
U.S. central bank increased borrowing costs in June for the second time
this year and forecast two more rate hikes for 2018.
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A shopper walks down an aisle in a newly opened Walmart Neighborhood
Market in Chicago in this September 21, 2011 file photo. REUTERS/Jim
Young/Files
While there is broad agreement the economy performed well in the second quarter,
economists have begun to question whether it can continue at this pace in the
face of trade tensions and rising rates. Economists in a Reuters poll earlier
this week predicted that growth will slow notably from here.
EXPORTS FRONT-LOADED
Growth in consumer spending, which accounts for more than two-thirds of U.S.
economic activity, is forecast accelerating from the first quarter's lethargic
0.9 percent rate, which was the slowest in nearly five years.
Consumer spending is being driven by the lower taxes and a robust labor market,
which created an average of 215,000 jobs per month in the first half of this
year.
The front-loading of deliveries of soybean and other goods probably boosted
export growth in the second quarter and offset a tariff-induced increase in
imports. That is expected to have sharply narrowed the trade deficit.
Trade is forecast to have contributed at least 1.5 percentage point GDP growth
in the second quarter after being neutral in the January-March period.
The import duties also likely prompted businesses to increase their pace of
inventory accumulation. Inventory investment probably added to output after
making no contribution in the first quarter.
Another quarter of solid business spending on equipment is expected, though the
pace has slowed from the double-digit growth experienced in the second half of
2017. The trade wars are casting a pall on the business spending outlook.
General Motors Co, Ford Motor Co and Fiat Chrysler Automobiles NV on Wednesday
cut their full-year profit forecasts, citing higher steel and aluminum costs.
Harley-Davidson Inc has warned that more expensive steel and aluminum and a 25
percent retaliatory duty imposed by the European Union on shipments from the
United States could cost the motorcycle maker $45 million to $55 million this
year.
"To keep the economy growing, the swing factor always is whether U.S. companies
are confident enough in the outlook to keep investing in the country's future,"
said Chris Rupkey, chief economist at MUFG in New York.
(Reporting by Lucia Mutikani; editing by Jonathan Oatis)
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