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Can the U.S. Sustain Strong Growth?

U.S. growth was strong, as expected, last quarter, notching up a 4.1% year over year gain. That's the fastest growth in four years. With the US economy having accelerated while economies in Europe, Japan and the UK look lackluster, the question is whether US growth at these levels will be sustained, and whether other economies can catch up. This will help determine whether the US dollar, and US stocks will reap the rewards. 

Strength was broad-based and registered in consumption, business fixed investment, government spending, and net exports, but with a drag from inventories. Tax reform and deregulation provided a lot of the impetus, as did tariffs. Given that composition of growth, the ongoing benefits of the tax cuts will be supportive for Q3, but it’s unlikely that another 4-handle on GDP can be maintained, especially with the FOMC's normalization posture.

Nevertheless, with the tight labor market and fatter wallets, consumer spending should hold up well. Business fixed investment might erode slightly, however, if the trade situation caused some projects to be put on the shelf. Net exports and inventories are likely to be the major wild cards, as the 13.3% surge in goods exports should slow, while inventory growth should bounce after the depletion in Q2. Attention will remain on developments overseas too, with respect to potential further slowing in Asia and Europe. The introduction of tariffs around the globe should slow exports from the U.S. and prevent export lead growth from the world’s largest economy.

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