“Moments ago, the numbers for America’s economic growth or GDP were just released,” he said, “and I am thrilled to announce that in the second quarter of this year, the United States economy grew at the amazing rate of 4.1 percent. We’re on track to hit the highest annual average growth rate in over 13 years, and I will say this right now and I will say it strongly, as the trade deals come in one by one, we’re going to go a lot higher than these numbers, and these are great numbers.”<doc-sep>That’s exactly the kind of investment that the tax law was meant to encourage. So far, however, there is scant evidence that companies broadly are reinvesting their tax savings. Business investment in equipment has grown more slowly in the first half of the year, and many companies are choosing to pay dividends and buy back shares instead. “Business spending is not picking up the way proponents of the tax cut had hoped,” said Michael Gapen, chief United States economist for Barclays. Instead, the tax cuts seem to be encouraging consumer spending, which rose 4 percent in the spring quarter, the biggest increase since 2014. Increased federal spending — the result of the two-year budget deal passed by Congress this year — is likewise giving the economy a lift, helping to nudge G.D.P. growth out of the rut of 2 to 2.5 percent where it has spent much of the recovery. Whether those policies are a good idea is another question. Many economists question the wisdom of passing what amounts to a deficit-funded stimulus package when unemployment is low and the economy is strong. Few outside the White House think a growth rate of 4 percent is sustainable in the long term, in part because the aging of the baby boom generation means a shrinking share of the American population is working. “It’s economic conventional wisdom that in times like this you should prepare for the future and get your fiscal house in order, and we’re really doing the opposite,” said Michael A. Peterson, chairman of the Peter G. Peterson Foundation, which has long argued for reducing the federal deficit. For policymakers at the Federal Reserve, the tax cuts and spending increases could pose a nearer-term challenge. The Fed has been trying to strike a delicate balance, raising interest rates gradually in an effort to keep inflation in check without snuffing out the recovery. If the second quarter’s growth rate continues, it could risk accelerating inflation and prompt the Fed to raise rates more quickly. That, in turn, could cause a recession. There is little to suggest that will happen, however. Inflation slowed slightly in the second quarter, and Friday’s report is unlikely to persuade officials to deviate from their gradual and carefully devised march to higher interest rates. The central bank is on track to raise rates twice more this year, after two increases in the first half of the year.<doc-sep>Boom! The US economy grew 4.1% in the second quarter of this year, the fastest pace of growth since late 2014. In the first quarter of 2018 growth was 2.2%, a bit stronger than initially estimated by the US commerce department. This means that, a year and a half into his term, Donald Trump got the 4% growth he promised his supporters. “GREAT” GDP numbers they are—on the face of it, at least. Dig a little into the broader data, though, and there are signs that the US economy’s pace of growth may be short-lived. First off, let’s look at the trend. The way the government presents the data—annualizing growth since the previous quarter—can be pretty noisy. The good news is, the much smoother year-over-year growth in real GDP also suggests that momentum keeps trucking along. On another positive note, the robust rise in that crucial engine of the US economy, household consumption, after a worryingly shabby showing in the first quarter of 2018. Another measure of underlying demand—final sales to private domestic purchasers, which excludes trade, inventories, and government outlays—grew at a rate of 4.3%, the second-fastest since 2014. But there’s reason to think the forces driving last quarter’s expansion lack staying power. A good chunk of the headline growth in the second quarter was boosted by a confluence of one-off and short-term measures by the US president. Take trade, for example. Net exports contributed a whopping 1 percentage point to real GDP growth last quarter—the most since 2013. But there’s fair reason to suspect that this isn’t due to an out-of-the-blue resurgence of US manufacturing, particularly given that the dollar was fairly strong versus other major currencies during the quarter. Much of this could instead be a knock-on effect of Trump’s trade war, as importers snapped up US goods before looming tariffs drove up prices. For example, soybean exports have jumped as buyers tried to get out ahead of the retaliatory tariffs on the agriculture product by China. But it’s unclear how the trade war will hit the economy in coming quarters. Companies are already reporting adverse impacts on business. GM, for example, said that higher commodity costs, from the tariffs on steel and aluminum, were eating into its profits and so cut its earnings outlook for the year, which wiped off billions in its stock market value. Harley-Davidson said it expects to take a financial hit of up to $100 million on an annual basis because of the tariffs, and so will move the production for EU bikes to international plants to try and mitigate this cost. In addition, it’s too early to tell whether trade war fears have crimped investment plans, which could deal a sharp blow to US growth. Similarly, Trump’s signature tax cuts may have helped spur the 7.3% increase in investment in offices, malls, hospitals, and other nonresidential structures. Government spending also made a significant contribution following from a big increase in the budget approved by Trump. Then again, overall investment fell versus Q1—meaning it dragged down last quarter’s real GDP growth. Growth in equipment investment was feeble, suggesting that tax cuts haven’t yet brought forth a US manufacturing revival. More ominously, residential investment—another big engine of US growth—fell by 1.1 percentage points, extending a slump in housing spending that began in Q2 2016. When good news is bad Today’s data also show that the US economy surpassed $20 trillion in nominal dollars in the first quarter. This is a long expansion—already the second-longest on record. In a year, it’ll overtake the decade-long period of consistent economic growth in the 1990s. Signs are mounting that the US could be approaching the end of this economic cycle. The end of the cycle is now the talk of the town. Analysts and finance execs have mentioned the “credit cycle” during earnings calls more than at any time since the last downturn, according to Sentieo. Other signs that this expansion could be nearer its end? Job growth is well into its longest and strongest stretch on record, while the unemployment rate is at lows not seen since 2000. Then there’s monetary policy to think about. The Federal Reserve is still raising interest rates, but the US yield curve is getting flatter. While that doesn’t have to mean a recession is imminent (the signal it’s sent previously), it does suggest that traders don’t think the US economy will warrant higher rates into the future—that there won’t be enough economic growth to support aggressive borrowing. Meanwhile, the current stock market boom is less than a month away from overtaking the longest bull run ever, which ended when the tech bubble burst in 2000. What lies beneath Amid all this shiny numbers about national economic growth and job creation and stock market records, there’s evidence of more fundamental problems underlying America’s economy. GDP merely measures economic output, not well-being. It gives us only a partial reading on the health of the US economy because it tells us little about which Americans are benefiting from booming output, and how much. US businesses have long since rebuilt their balance sheets; for most of the last decade, they’ve raked in handsome profit. Yet workers’ pay has barely grown, despite unemployment dropping far beyond expectations. This staggering fact is more baffling still given Trump’s massive tax cut. In passing the measure, he and other Republican leaders told American workers to expect raises, promising that slashing tax payments of rich people and corporations would put more money in their pockets. How’s that worked out? As you can see, not well. Last month, average real pay actually shrank. That might be a monthly blip. Then again, it’s in keeping with an overall trend of slipping wage growth. Trump’s GDP paints a picture of a booming America. But the one most Americans live in is a bust.<doc-sep>
"We're on track to hit the highest annual growth rate in over 13 years," President Donald Trump said in remarks an hour after the report hit. "And I will say this right now and I will say it strongly, as the deals come in one by one, we're going to go a lot higher than these numbers, and these are great numbers." That's the fastest rate of the growth since the 4.9 percent in the third quarter of 2014 and the third-best growth rate since the Great Recession. In addition to the strong second quarter, the Commerce Department revised its first-quarter reading up from 2 percent to 2.2 percent. The number matched expectations from economists surveyed by Reuters and was boosted by a surge in consumer spending and business investment. Stock market futures edged lower on the news while government bond yields moved lower. Gross domestic product grew at a solid 4.1 percent pace in the second quarter, its best pace since 2014, boosting hopes that the economy is ready to break out of its decade-long slumber. In addition to the rise in consumer and business spending, increases in exports and government spending also helped. Personal consumption expenditures rose 4 percent while business investment grew 7.3 percent and federal government outlays increased by 3.5 percent. Exports rose in part as farmers rushed to get soybeans to China ahead of expected retaliatory tariffs to take effect in the coming days. Declines in private inventory investment and residential fixed investment were the main drags, the report said. The tariffs as well as last year's massive tax cut both were key factors in the growth. "Bottom line, if it wasn't for a big upside to inflation, GDP would have been much better because of the upside in spending, boost in exports and government spending which offset an unexpected sharp decline in inventories and no change in gross private investment," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "We hope capital investment continues to improve in light of the tax incentive to ramp up," he added. "The consumer has tax cuts and higher wages on one side and a low savings rate and a recent credit card binge on the other." In recent days, White House officials had been indicating the reading will be strong. President Donald Trump himself tweeted a few days ago that the U.S. has the "best financial numbers on the planet," while National Economic Council Chairman Larry Kudlow predicted on Thursday that Q2 GDP will be "big." The administration has used a mix of tax cuts, deregulation and spending increases to goose growth. White House budget director Mick Mulvaney told CNBC earlier this week that deregulation likely has had the most impact so far as companies feel more comfortable about committing capital. The next question will be whether the growth spurt is sustainable. There were several jumps in GDP under former President Barack Obama. That Q3 increase in 2014 was preceded by a 5.1 percent rise in the second quarter. But by the end of 2015, growth had slowed to 0.4 percent. Federal Reserve officials forecast GDP to rise 2.8 percent for all of 2018 but then to tail off to 2.4 percent in 2019 and 2 percent in 2020. Some economists worried that the jump in consumer spending for the April-to-June period may not be sustainable, adding to skepticism that the gains will continue. "Personal consumption would need to keep up with this impressive pace to see a solid second half," said Ian Lyngen at BMO Capital Markets. Economists generally expect the trade war between the U.S. and China to temper further growth. Trump has slapped 25 percent duties on $34 billion worth of Chinese imports and has threatened $200 billion more. The administration also has put tariffs on steel and aluminum. However, more recently the administration said it has made progress on trade agreements with the European Union. In a recent forecast, Goldman Sachs said the effects from trade disputes are "typically modest," shaving about 0.2 percent from output. Get the market reaction here.