On Friday morning at 8:30, the U.S. government will release data on how fast the economy grew from April to June. Economists and the White House are expecting a huge number, but experts caution it’s likely to be a one-time surge that is not sustainable.
The consensus forecast is that the economy grew 4.2 percent in the second quarter, which would be a big jump from the 2 percent growth in the first quarter and nearly double the average annual pace of growth during the recovery. Some economists predict the rate of growth in gross domestic product could come in as high as 5 percent, a figure President Trump would probably herald as proof of his economic success in the face of his critics, although it is a quarterly growth rate, not an annual one.
“Somebody actually predicted today 5.3 [percent]. I don’t think that is going to happen,” Trump said in a speech in Illinois on Thursday. “If it has a 4 in front of it, we’re happy.”
Economists say the spike is coming mainly from a fluke: There was an unusually large increase in exports in the spring that probably came because other countries were trying to buy U.S. goods before Trump’s trade war escalated and tariffs kicked in. Soybeans exports, for example, surged 9,400 percent in the period from March to May over the prior year, Morgan Stanley said. China, a major buyer of U.S. soybeans, put hefty tariffs on the American crop this month in retaliation for Trump’s levies on numerous Chinese products.
This is “likely a reflection of stockpiling ahead of the implementation of trade tariffs,” Morgan Stanley economists wrote in a note to clients this week, and they warned that it’s likely that growth will revert to a much lower level in the second half of the year as foreign countries slow their purchases of U.S. goods.
Growth this spring is probably “as good as it gets,” said Joseph Brusuelas, chief economist at the audit firm RSM. Like many economists, he expects that the jump in exports added as much as two percentage points to second-quarter growth and that the increase will disappear in the summer and fall.
The GOP tax cuts are also driving some of the uptick, economists say. Consumer spending and business investment are expected to show some pickup, although debate remains over whether it will be a sizable boost. The White House predicts growth will be strong in 2018 and continue on a faster track for the next decade, but many independent forecasters, including the Federal Reserve, predict growth will stay below 3 percent this year and will fall back down to around 2 percent by 2020.
Here’s what to watch for when the Bureau of Economic Analysis (BEA) releases second-quarter GDP growth Friday.
1) It’s likely to be a big number, but not unprecedented. It’s not unusual to get a really large growth number for a single quarter. During the Obama administration, for example, the GDP growth rate topped 4 percent for several quarters and hit 5.2 percent in the third quarter of 2014.
“The underlying momentum in the economy is good, but not 4.5 percent good,” said Ben Herzon, executive director of Macroeconomic Advisers. He expects growth will fall back to around 3 percent the rest of the year.
2) Is it sustainable? The vast majority of economists predict strong second-quarter growth won’t be sustained. The export surge is likely to be temporary, meaning it will take a big jump in consumer or business spending later in the year to keep growth high, something that will be hard to do.
“The trade deficit is widening again, and this is likely to make that 4 percent real GDP growth [Friday] an anomaly, not the norm,” said Chris Rupkey, chief financial economist at MUFG bank. “The Trump administration sees blue skies and 3 percent economic growth ahead, while Fed officials’ forecasts see just 2 percent growth in 2020.”
3) Look closely at business investment. The GOP tax cut was supposed to spur companies to spend more on new equipment and factories. That, in turn, is supposed to make workers more productive so employers will pay them more. The evidence so far is of a very modest pickup in business investment. Economists will be looking closely for signs that companies are opening their wallets to spend money from the tax-savings windfall.
4) Watch for revisions to past GDP. Every few years, the BEA revises its methodology for calculating growth to incorporate better data and best practices. In addition to releasing second-quarter GDP growth Friday, the BEA will also unveil revised historical data. It’s not expected to show much change, but it could lead to a few surprises.
The Trump administration has touted that growth picked up since Trump took office. They often point to the rate of GDP growth averaging more than 3 percent from April to December of last year, but that figure might change Friday.