First quarter economic growth data has been unreliable in recent years. The government’s seasonal adjustment of data is large in the winter and is quite complicated. The first quarter also tends to have outsized weather effects and changing consumer trends. Some consumers use discretionary funds to pay down holiday credit card debt, while others utilize holiday gift cards.
Consequently, the second quarter figures better represent the current state of economic health. Some economists expect US economic activity, as measured by Gross Domestic Product (GDP), to show 4%growth in the second quarter. The four major positive components of the US economy may continue to grow for the foreseeable future:
The consumer(or consumption) represents 69% of US GDP. Consumer confidence reached an 18-year high and remains near its all-time high. While many consumers are focused on paying down debt, in aggregate the US consumer has a strong balance sheet with a net worth of $100 Trillion ($116 Trillion of assets and almost $16 Trillion of liabilities).
A strong job market is providing a rising income through employment, raises, bonuses and opportunities to move. Voluntary job departures are near their 2001 peak. The average job seeker who voluntarily left one job for another is receiving 30% more pay from their new employer.
US jobless claims are near 40-year lows. Recent unemployment rates of 3.8% to 4% are near lows last seen in 1969 when men were being drafted. For the first time there are more job openings than job seekers in the US.
Since the average American tends to spend their full paycheck, the combination of more jobs, higher pay and lower payroll taxes should produce a strong increase in consumption. As this represents 69% of the US economy, overall economic growth numbers should continue to be strong.
17% of GDP is from government spending. Recent federal budget agreements result in increased federal government spending. State and local governments are seeing greater than expected revenues from a stronger economy and last December’s tax law. Similar to the average consumer, when some states receive extra revenue, they find a way to spend it. Overall, government spending is certainly expected to rise, which can benefit the economy short-term.
Investment(excluding housing) represents 13% of the US GDP. Changes in capital spending tend to have a one year lag to corporate earnings growth. Currently, corporate earnings growth before taxes is strong. Given recent tax law changes that include foreign cash repatriation and the largest cut ever in corporate tax rates, corporate earnings are setting records.
Corporations repatriated over $300 billion of cash during the first three months of this year. This record pace may be exceeded when other quarterly data is released later this year. Some of this money will help fund future capital investments and further grow the economy.
4% of the economy is based on housing. Since long-term interest rates remain low relative to history and job growth remains robust, housing should continue to grow. The millennials are getting better jobs and are moving out of their parent’s basements.
These four positive components of GDP add up to 103%. Whereas the US imports more than it exports, global trade (or net-exports) is negative -3% points of US GDP. Since net exports is a large positive number for some of our trading partners, it is in their best interest to quickly negotiate new trade agreements.
All four areas of the domestic economy are growing with forecasts to continue expanding. There will always be concerns and caveats. Six months ago, North Korea’s nuclear ambitions and ballistic missiles fired over Japan were a top concern. Today, trade wars and tariffs are concerning. Currently proposed tariffs should hurt US economic growth by less than 1% point. As such, if and when these tariffs become effective, overall US economic growth could still exceed 3%.