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GDP Growth Hits Four-Year High: Key Takeaways for Investors

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U.S. gross domestic product, or GDP, rose at an inflation-adjusted annual rate of 4.1% from April through June, according to Commerce Department data released today. This growth is at the strongest pace in four years and was fueled by consumer spending, strong exports, and business investment. This result is also big hike from the first quarter’s adjusted rate of 2.2%.

The director of the White House’s Office of Management and Budget, Mick Mulvaney, said such strong growth in the U.S. economy is no ‘sugar high’ and will likely persist due to Trump’s growth formula.

President Trump said Friday that the U.S. economy is growing at an extremely “sustainable” pace and showed confidence that it will expand at least 3% for the year.

Consumer Spending

Strong consumer spending helped boost GDP growth. The tight labor market, a very low employment rate, steady job and wage growth, and the recent tax overhaul were all reasons driving consumer confidence.

Consumer spending makes up a large portion—two thirds—of total economic output. Today’s report said that personal-consumption expenditures rose at a 4% annual rate this quarter.

Trade

Despite the ongoing trade dispute, trade contributed significantly to GDP growth. Net exports added 1.06 percentage points to the quarter’s GDP rate.

Even as China nearly replaced its source of soybeans to Brazil in response to the tit-for-tat trade war with the U.S., the Commerce Department said soybean exports surged in the second quarter.

While exports grew robustly, imports were relatively flat. The recent trade actions by Trump has also pushed up the prices for some goods that U.S. producers are selling to other nations.

Business Investments

The 2017 tax law, designed to encourage investments from business by lowering the corporate tax rate, was a big contributor to growth as well. It let companies immediately deduct specific types of capital spending instead of letting it depreciate over time.

What to Watch: Interest Rates

Today’s strong report will make it highly possible for the Federal Reserve to raise short-term interest rates. Although it has recently changed its stance on rate hikes from “for sure” to “for now,” due to the flattening yield curve, this report seems to suggest the Fed will go along with its plan to make two more increases by the end of 2018.

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