Confident consumers propel US growth to a four-year high

According to the Bureau of Economic Analysis, the US economy grew by 4.1% annualised in the second quarter of 2018 – its fastest pace since the third quarter of 2014. Growth was marginally below consensus expectations of 4.2%, but the first quarter growth rate was also revised up, satisfying expectations more generally.

There has been a seasonality problem with US GDP data in recent years between the first and second quarter, with the former usually depressed by poor weather, and the latter being higher. Our estimate of seasonality suggests that the Q2 GDP growth should actually be 3.2% annualised, although as our estimate for Q1 is the same as the current estimate (2.2%), this would still represent an improvement in growth.

Strong contribution from household spending

Within the detail of the GDP release, strong household spending was the main reason for the acceleration, contributing 2.7 percentage points (pp) to the headline figure.

Net trade was the second biggest contributor as the volume of exports surged by 9.3%, while imports slowed to just 0.5% growth. Net trade contributed 1.06 pp – its biggest contribution since the fourth quarter of 2013.

Meanwhile, gross private investment fell slightly over the quarter, but this was caused by significant destocking. When inventories are excluded, not only is investment overall growing at a solid pace, but real final sales (GDP excluding inventories) grew by 5.1% - its fastest rate since Q1 2006.

Fed set to continue tightening

Overall, a very strong quarter of growth for the US, which may require us to revise up our forecast for this year. Both domestic demand and net trade made strong contributions, against a backdrop of loosening fiscal policy, which will only serve to boost growth further.

As for monetary policy, the data is consistent with Chairman Powell’s recent optimistic testimony, which should keep the Federal Reserve on a steady course of modest hikes and quantitative tightening.