FINANCIAL TIP FROM DAVID:
4.1% GDP Growth
The economy grew by 4.1% in the second quarter of this year. That is the highest level of growth since 2014 and the fourth highest reading since the current recovery started in 2009. What this means for all of us is that if the economy can grow at near that level for an extended period of time, and inflation is held relatively in check, then there is more disposable income for most Americans. This would translate into greater consumer spending and thus further growth in the economy and specifically in the stock markets. Can we continue that growth rate going forward?
Many economists do not believe the current structure of our economy from demographics to budgetary obligations can maintain that level of growth. They point to the current 4.1% growth rate as a product of other factors. One of those is the current tariff battle that may have encouraged a lot of second quarter economic activity as firms accelerated purchases ahead of upcoming higher prices due to the tariffs. This activity added just over one percentage point to the latest GDP reading. Economists that support the theory that 4% sustained growth is possible will counter that the slowing housing market subtracted one percentage point from second quarter GDP. These same economists argue that we have a housing shortage and the recent slowdown will reverse itself. Another factor of the recent GDP that can be argued both ways were inventories. Company inventories of their products and services fell in the second quarter which is a net negative for GDP calculations. Economists that are bullish on GDP will then counter that those inventories will have to be replaced thus leading to higher GDP growth in upcoming quarters.
There is no way to know what future growth rates will be ahead of time, unfortunately. To put the latest numbers in perspective, average annual GDP growth since the recovery started in 2009 has been 2.3%. The last two recoveries of 2001-2007 at 2.6% and 1991-2000 at 3.6% were both sub 4% yet allowed for more opportunity for everyone and thus higher potential stock prices. Regardless of how much GDP will be for 2018, currently projected to end the year at 2.9%, any increase over the prior years is a much needed boost. When you have a $20 trillion economy, as we do, small increases equate to large sums of additional monies running through the economy.