Gross domestic product (GDP) accelerated at a rate of 4.1% in the second quarter, nearly double the first quarter’s growth rate of 2.2%. The growth spurt was due in large part to increases in personal consumer expenditures and in exports, according to the United States Bureau of Economic Analysis (BEA). The quarterly increase was the highest in nearly four years.
“Candidly, from my perspective, consumer spending and household finances are about as solid as I have seen since I started doing this a couple of decades ago,” Christopher Thornberg, founder of Los Angeles-based Beacon Economics, told the Business Journal. “We have a great economy. The fundamental problem is we live in a political world which is running around pretending we have a terrible economy when we have a great economy.” He added, “And, you know, if you’re running around trying to fix problems that don’t exist, you’re going to cause different problems.”
Thornberg pointed out that the BEA has revised its estimates for consumer savings and personal income. “The folks at the BEA do the best they can. They are constantly revising their numbers when more data comes in,” he said. “Every two years they revise numbers. Over the last year and a half, one of the disturbing numbers was the fact that it looked like consumer savings rates were dropping.”
Recently, the BEA revised its personal income and savings estimates, showing stronger growth rates. For example, personal income in 2017 was revised up $401.9 billion, 2.4% higher than the original estimate. Revised personal savings estimates also showed growth, erasing Thornberg’s concern about the unrevised statistics. The personal savings rate in 2017 was revised up from 3.4% to 6.7%.
Exports increased by 13.3% in the second quarter, playing a key role in GDP growth. Whether the U.S. sees similar increases in coming quarters is a question for President Trump, Thornberg said. “He seems quite motivated to create trade disruption,” he commented. “Obviously it was getting ugly, particularly with the European Union. One bit of good news lately is it looks like we have settled some of our issues with the European Union and we’re going to sit down and start negotiating with them. We don’t have any specifics . . . but you know, it’s a positive development, there is no doubt about that,” he said.
“Growth is the default mode of the economy,” Thornberg said. “We’re in a good position because there are people out there working to get ahead. There are business people out there building their companies. . . . We are doing well because we are in equilibrium.”
Thornberg had been expecting a GDP increase of about 4.5% for the second quarter. “The surprise in the data was a bigger runoff in inventories than anticipated,” he said, referring to a higher inventory-to-sales ratio of goods.
Residential fixed investment decreased by about 1.1%, according to the BEA. Residential fixed investment includes sales and construction of single-family homes and multi-family homes, as well as construction of institutional dwellings such dorms and prisons. Thornberg wasn’t surprised by this statistic.
“The housing market is basically where it needs to be,” he said, referring to the national housing market. “We are building 1.2 million or 1.3 million units per year, which is about what we need relative to our very slow population growth and household formation.” He added, “It’s not indicative of a bad housing market.”
Economic growth in the second quarter was driven by the fiscal stimulus put in place by Congress at the end of 2017, according to Thornberg. “That acceleration in [consumer and business] spending is all being driven by the fact that we have a good core economy and on top of that core economy we have plopped fiscal stimulus,” he said.
The fiscal stimulus is “basically driven by government borrowing,” Thornberg said. “We live in a full employment economy already. We didn’t need stimulus,” he said. “The net result of all that of course is we have a situation where we’re borrowing from the future, and the issue here is there is no need to.”
Thornberg continued, “Things were perfectly fine. But perfectly fine wasn’t good enough. So we accelerated the economy by borrowing against the future. And at some point in time over the next couple of years, we will pay for this. At some point in time, there is going to be a letdown. At some point in time, the government is going to have to get their balance sheet back in balance, and that is going to mean higher taxes and less spending. And that’s going to cause the economy to slow down.”