The Bureau of Economic Analysis said that the U.S. economy grew by an annualized 4.1 percent in the second quarter of 2018, the best reading since the third quarter of 2014 and up from 2.2 percent growth in the first quarter. Robust growth in consumer and business spending and exports boosted the data. Since the end of the Great Recession, the U.S. economy has expanded 2.2 percent on average. Moving forward, real GDP should grow by roughly 3 percent in 2018, which would be the strongest growth rate since 2005.
Indeed, over the past six months, tax reform and regulatory relief have sparked the robust manufacturing job growth manufacturers predicted. The business optimism of our member companies stands at a record high, and 86 percent of them plan to invest in new plants and equipment, 77 percent plan to increase hiring, and 72 percent plan to increase wages and benefits for workers. That is driving the robust growth we are now seeing reflected in today’s report, placing an urgent need to grow and upskill the manufacturing workforce.
After some softness in the first quarter, consumer spending rebounded significantly in the second quarter, providing the largest boost to growth in the headline number. Personal consumption expenditures rose 4.0 percent at the annual rate in the second quarter, bouncing back from a gain of 0.5 percent in the first quarter. Motor vehicles were a large part of this recovery, with durable goods jumping an annualized 9.3 percent in the second quarter after falling 2.0 percent in the first quarter. Nondurable goods and service-sector spending rose 4.2 percent and 3.1 percent in the second quarter data, respectively. Overall, personal spending contributed 2.69 percentage points to real GDP growth in the second quarter, a nice improvement from the paltry 0.36 percentage-point contribution in the prior report.
Nonresidential fixed investment was also strong, up 7.3 percent in the second quarter at the annual rate and extending the solid 11.5 percent gain in the first quarter. This increase was led in both quarters by very healthy growth in structures spending, up 13.9 percent and 13.3 percent in the first and second quarters, respectively. Business spending on equipment and intellectual property rose 3.9 percent and 8.2 percent, respectively, in the latest figures. On the downside, residential fixed investment declined for the second straight quarter, down 1.1 percent. In total, fixed investment—which includes residential and nonresidential activity—added another 0.94 percentage points to top-line growth. In addition, government spending added 0.37 percentage points.
On the international trade front, goods exports soared by an annualized 13.3 percent in the second quarter, the highest rate since the fourth quarter of 2013. This could indicate some time-shifting of export purchases due to ongoing trade negotiations and tariffs, and it was more than enough to offset the 1.0 percent increase in goods imports in the second quarter. As a result, the net exports of goods and services contributed 1.06 percentage points to real GDP growth for the quarter.
Inventory spending was the main negative on growth in the second quarter, subtracting 1.00 percentage points from the headline figure. In layman’s terms, this suggests that real GDP growth could have been more than 5 percent without the drag from inventories. One silver lining: the pullback in spending on stockpiles in the second quarter should lead to increased activity in the third quarter, which could buoy real GDP figures in the upcoming data.