Today we are talking about the economy? The numbers looked good last quarter. What is driving it?
The economy certainly seems to be in high gear at the moment. On Friday, the Commerce Department reported that gross domestic product – a figure that measures goods and services produced in the economy – grew 4.1 percent in the second quarter of 2018. A number of factors contributed to this growth. First, consumer spending, which accounts for 2/3 of economic activity in the US economy, continued to be strong. Americans opened up their wallets last quarter, buying cars, electronics and clothes, eating out and traveling. All of this despite low wage growth and rising gas price.
Additionally, the effects of the 2017 tax cut continue to make their way through the economy, and government spending has helped to fuel higher rates of growth.
Should we expect this to continue?
The fundamentals of the economy continue to be strong. Unemployment is very low, corporate profits are high, manufacturers are seeing strong demand for products, and exports have ramped up in recent quarters. Some analysts are increasingly confident that the US economy could see 3 percent annual growth for the first time since the Great Recession. Yet others are not so sure, believing these strong GDP numbers may be short-lived. They point to a number of risks on the horizon that could have negative consequences for the economy, including the looming threat of protectionist trade policy, rising consumer debt, and struggling wage growth.
What types of warnings signs are we seeing?
Given the role consumer spending plays in fueling our economy, the signs that Americans are overextending themselves could have big consequences. Currently, consumer spending has been growing faster than take home pay, meaning that Americans are saving less and, in many cases, taking on more debt. Savings as a percentage of disposable income is 3.2%, near its all-time low of 1.9% in 2005. After ten years of moving in the right direction – canceling cards and paying off debt –people are once again breaking out the plastic and starting to struggle to pay them back. As people save less and spend more on accrued debt, that threatens consumer spending on other things.
The trade war also looms large. While the effects of the current tariffs the White House has levied seem to have had a small effect on growth, future tensions could quickly ripple through the economy. Last quarter, exports grew by 9.3 percent, accounting for a quarter of the total G.D.P. growth. Looking forward, we are unlikely to see a continuation of that trend. As a result of continuing trade disputes, exports will almost certainly fall in coming quarters, and may drag down overall G.D.P. growth rather than boosting it.
What does all of this mean for everyday Americans?
Well Tom, the tight labor market should continue to benefit everyone. Not only does it mean steady, if not spectacular wage growth, but we are likely to see more Americans who had stopped looking or who were only able to get part-time work participate in the labor force. For those of us are invested in the stock market, the continued strength of corporate America is also good news.
There are some negatives that are on the horizon too. Due to the strong fundamentals, the Fed is expected to continue to steadily raise interest rates. This will make borrowing money – for a house, for a card, your credit card debt – more expensive. In addition, higher tariffs mean more expensive goods for consumers on everything from agricultural imports to electronics to washing machines.
In general, the current strong economy is good news and should benefit most Americans. However, the current rate of growth is not something we can take entirely for granted.
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