PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Strong Second Quarter Growth for U.S. Economy

By at 27 July, 2018, 11:53 am

Small Business Insider: The Economy

by Raymond J. Keating-

Second quarter real GDP growth, according to the U.S. Bureau of Economic Analysis, grew at a strong 4.1 percent annualized rate. That was the fastest growth rate since the third quarter of 2014. It also was a sharp step up from sluggish growth over the previous three quarters.

Among key points in the second quarter data are the following:

Real growth in personal consumption expenditures bounced back from a mere 0.5 percent in the first quarter to 4.0 percent. With business investment being strong and hiring continuing, one would expect to see stronger numbers from the consumer.

Business investment continued its strong growth for the sixth consecutive quarter, helping to fuel current and future economic growth. Real fixed nonresidential investment grew by 7.3 percent in the second quarter, including 13.3 percent growth in structures investment, 3.9 percent in equipment, and 8.2 percent in intellectual property products. It must be noted that a dramatic change in tone and policy on the tax and regulatory fronts over the past year and a half has been a big plus for business and the incentives for investment.

Interestingly, private inventories actually contracted, and wound up subtracting 1.0 percentage point from the overall GDP growth rate in the second quarter. That’s the biggest falloff since the first quarter of 2014. The inventory factor is temporary, and we should see a bounce back in the next quarter or two, which will add to growth.

Exports were a big plus in this report, growing by 9.3 percent in the second quarter. At the same time, imports performed poorly, with a growth rate of only 0.5 percent. Given the enormous uncertainties regarding trade policy, one has to assume that this exports number will be a temporary phenomenon. The Commerce Department has noted that there was a boon in soybean exports to China, with buyers seeking product before tariffs went into effect. Looking ahead, trade ranks as the major unknown for economic growth.

The U.S. economy does not turn on a dime, and during the Trump administration, this is the first quarter of solid real GDP growth. It’s also the first quarter of strong growth in nearly four years. During and after the recession that lasted from late 2007 to mid-2009, public policy was pointed in an anti-growth direction during the Obama years, including higher taxes, increased regulation, a higher level of government spending and debt, and an absence of leadership on advancing free trade. That clearly had a negative effect on the economy and growth. Since Donald Trump entered the White House, two key policy areas – taxes and regulations – have been turned in a pro-growth direction, boosting incentives for investment, with positives being seen in terms of enhanced business investment and now faster economic growth.

Over the past decade-plus, the key issue when we’ve had a solid quarter of growth has been sustainability, or more specifically, the lack thereof. More pro-growth tax and regulatory policies should fuel greater sustainability on the growth front, though with misguided and costly tariff measures are pushing in the opposite direction. If the U.S. reverses course on trade, and reclaims its traditional leadership on freer trade, the foundation for stronger economic growth would be further improved to the benefit of all.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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