U.S. Economy Grew at 4.1 % Rate in Second Quarter

Consumer spending, exports and business investment power strongest growth pace in nearly four years

The U.S. economy grew at the fastest pace in nearly four years this spring, reflecting broad-based momentum that suggests the second-longest expansion on record is not yet running out of fuel.

Robust consumer spending, solid business investment, surging exports and increased government outlays were among the factors that boosted gross domestic product—the value of all goods and services produced across the economy—at a seasonally and inflation-adjusted annual rate of 4.1% in the second quarter, the Commerce Department said Friday, July 27, 2018.

That was up from the first quarter’s revised growth rate of 2.2 % and the strongest growth since the third quarter of 2014.

While some of the growth came from a burst of exports that some analysts warned could be a temporary response to looming trade tariffs, the details of the report suggest underlying strength that could tee up one of the best years in the current expansion, which began in 2009.

After stripping out the volatile categories of trade, inventories and government spending, sales to private domestic buyers rose at an annual rate of 4.3 %—even better than the overall GDP number.

“The outlook for the industrial economy remains solid,” United Parcel Service Inc. Chief Executive David Abney said during a call with investors on Wednesday.

Friday’s report makes it highly likely the Federal Reserve will continue gradually raising short-term interest rates to prevent the economy from overheating. Central bank officials have raised rates twice this year, and pencilled in two more increases in 2018 and three in 2019.

The Fed is widely expected to leave its benchmark rate unchanged at its policy meeting next week and then increase it in September by a quarter of a percentage point, to a range between 2 % and 2.25 %.

A machine operator at the Mid Continent Nail Corp. looks at a set of nails that fit into a nail gun at the company’s factory in Poplar Bluff, Mo., in June

Consumers—buoyed by low unemployment, steady job growth and recent tax cuts—ramped up their spending at a robust 4 % annual pace in the second quarter.

Isaac Gary, 22, who works full time as a telecommunications project administrator in Chicago, said he recently bought himself a used car and is planning to go on a cruise to Cozumel, Mexico, for his birthday in September.

Mr. Gary said he also works for a private security firm on weekends and has a small online shoe reselling business, “so I was pretty comfortable shopping for a new car.” Referring to his multiple income sources, he added, “I do feel confident because I have different networks coming in.”

As Americans spent more, however, they saved less. The personal saving rate was 6.8 % in the period, down from 7.2 % in the first three months of the year.

In a potential warning signal for future spending, consumer sentiment cooled in July, continuing to moderate from a 14-year high the index of consumer sentiment touched earlier this year, the University of Michigan said Friday. “Concerns about tariffs greatly accelerated in the July survey,” said Richard Curtin, the survey’s chief economist.

Trade contributed strongly to the economy’s performance. Net exports added 1.06 percentage point to the second quarter’s 4.1 % GDP growth rate, which likely reflected a surge in soybean exports as buyers abroad rushed to get their supplies before China’s 25 % retaliatory tariffs on the U.S. crop hit in July.

“Some giveback in this unusual spike should be expected,” JPMorgan Chase economist Michael Feroli said in a note, adding “ongoing dollar strength is another reason to believe that last quarter’s big net export addition to GDP growth won’t be repeated soon.”

According to Mastercard Inc. CEO Ajay Banga, however, recent trade tensions had not yet caused widespread economic damage. “There are geopolitical and trade-related risks that we are keeping a close eye on,” Mr. Banga told investors on a call Thursday. “But as of now, they had limited impact to date and global economic trends remained generally positive.”

For some Americans, trade barriers are causing anxiety. Terry Schultz, president of Madison, S.D.-based seed producer Mustang Seeds, said tariffs on U.S. soybean exports have “ramped up pressure on profitability” for the farming sector, which has already been under pressure from lower commodity prices in recent years. “Our sales numbers are good. What’s always a concern is the profitability of our customers and their ability to pay us,” Mr. Schultz said.

A key measure of business spending moderated from the first quarter but remained robust. Non-residential fixed investment—reflecting spending on commercial construction, equipment and intellectual property products such as software—rose at a 7.3% rate after rising 11.5% in the first quarter.

The 2017 tax overhaul was designed to encourage such investments by lowering the corporate tax rate and by letting companies immediately deduct certain capital expenditures instead of depreciating them over time.

Tax cuts were part of President Donald Trump’s plan to boost economic growth to the above-3% annual growth rate that marked the robust expansions of the 20th century.

He hailed the GDP report Friday, saying the economy is growing at a “very sustainable” pace and predicting it will expand at least 3 % this year.

Economic forecasters largely agreed the tax legislation would boost growth in the near term, but were split over whether the legislation would increase the economy’s growth rate over the long term in the face of an aging population and meager productivity growth.

Output rose 2.8% in the second quarter from the same period of 2017. Fed officials expect to see growth hit the same pace in the fourth quarter of this year from a year earlier, which would mark the best calendar year since 2005. However, they forecast growth to ebb to 1.8% a year in the long run.

“Enjoy it while it lasts,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said of the strong second quarter. He expects consumer spending to slow in the third quarter as the boost from the tax cuts fades.

The GDP report included two main soft spots—housing and inventories.

Residential fixed investment fell at a 1.1 % rate in the second quarter. That could reflect higher mortgage rates, low housing inventory and tax-code changes that diminished decades-old perks that encouraged homeownership.

A drop in inventories subtracted 1 percentage point from the second-quarter growth rate, largely offsetting the gain from exports.

Some analysts said, however, that could help boost third-quarter growth if businesses restock their shelves in anticipation of continued strong demand.

Growth has been lackluster during the current expansion compared with its recent predecessors: From the second quarter of 2009 through the second quarter, GDP increased at an average annual rate of 2.3 %, below the 2.9 % rate during the 2001-07 expansion and the 3.6 % rate from 1991 to 2001.