Sugar Magnolia: Is the Economy’s/Earnings’ Surge a Sugar High or Sustainable?

Key Points

  • Real GDP surged in the second quarter; with big boosts coming from consumption and exports.

  • Productivity’s improvement is underappreciated.

  • Earnings growth is surging and the stock market is not as narrow as many believe; but the expectations bar is high, and ongoing trade disputes are a growing risk.

Is the boost the economy and corporate earnings have received from tax cuts a sugar high, sustainable or something in between? At this point, I’ll vote for something in between. Let’s start with the overall economy and Friday’s gross domestic product (GDP) report. Although GDP is a purely backward look at the economy, it received more than the typical attention in light of the hoped-for surge, as well as the annual benchmark revisions accompanying the report.

Surging growth

Real (inflation-adjusted) GDP jumped to a 4.1% annual rate in the second quarter; below the consensus estimate of 4.4%, but the highest pace of growth in nearly four years. First quarter growth was revised up to 2.2% from 2.0% as part of the comprehensive revisions of GDP data back to 1929.

The table below looks at the component parts and weights of GDP and compares the second quarter to the prior three quarters. Personal consumption expenditures (PCE)—accounting for nearly 70% of the U.S. economy—rose 4.0%; with services up 3.1%, durable goods up 9.3% and nondurable goods up 4.2%. However, PCE was revised lower as a share of GDP for each year since 2007.

Exports surged 9.3% courtesy of energy-related product exports; but importantly also the acceleration in soybean exports in advance of the retaliatory tariffs put in effect by China. Given that import growth was much weaker at only 0.5%, net exports were on fire. The pace of growth will almost assuredly slow in future quarters.