Why Friday’s GDP Number May Be a Size Too Big

Preliminary data from the Commerce Department is expected show that the U.S. gross domestic product grew at an annual rate of more than 4 percent in April through June. Some economists think growth may have topped 5 percent — a figure reached only once in the eight years of the Obama administration as the economy recovered from the recession.

While he said he did not know the actual number, President Donald Trump didn’t wait to herald rosy news. At an event in Iowa on Thursday, he said he was expecting a very strong result, noting predictions that ran to 5 percent or higher. “It could be very close,” he said. “Could even happen.”

“We’ll take anything with a four in front,” he added.

Even a number starting with a four, though, will almost certainly be misleading. Several one-time factors — including a surge in exports tied, at least in part, to Trump’s trade policies — probably combined to pump up growth in the second quarter. Those effects will not last, and economists expect growth to slow in the second half of the year. Pretty much no one outside the White House thinks a growth rate of 4 percent is sustainable in the long term.

Still, recent data does suggest that the pace of growth has picked up this year. Some economists think full-year growth in the gross domestic product could hit 3 percent in 2018 for the first time since 2005. “The bottom line is that the economy is doing better,” said Diane Swonk, chief economist for the accounting firm Grant Thornton.

Economists, though, will be digging deeper into the report to figure out how much of the acceleration is driven by short-term factors and how much reflects a real shift in the underlying pace of growth.

Here are three questions that will help distinguish a solid report from a great one.

Economists are nearly unanimous in thinking that the escalating rounds of tariffs and countermeasures will be bad for the U.S. economy in the long run. But for one quarter, at least, trade tensions could have actually led to faster growth, as foreign buyers rushed to stock up on U.S. goods before tariffs took effect. The resulting surge in exports could add a percentage point or more to the GDP figure.

The trend is particularly clear in exports of soybeans, which were up more than 50 percent in May from a year earlier. Those buyers presumably did not want more soybeans than usual — they just wanted them sooner. Exports will almost certainly slump in the third and fourth quarters, and will turn into a drag on overall economic growth.

For a better sense of the pace of growth, economists will look at what the Commerce Department calls “final sales to domestic purchasers.” That measure strips out the effects of trade and of inventories, which can be similarly skewed by quirks of the calendar. (Both numbers are also subject to big revisions.) Anything above 3 percent would reflect strong underlying growth.

Early this year, Congress approved a budget that will increase federal spending by hundreds of billions of dollars over the next two years. Many economists question the wisdom of passing what amounts to a debt-funded stimulus package when unemployment is low and the economy is strong. But whether or not they like the policy, they agree it will give the economy a temporary jolt.

Unlike the trade effects, the lift from government spending will not disappear overnight. Most economists expect the budget deal to keep adding to growth for the rest of the year and into 2019. After that, though, the effects will fade.

As a result, some economists are focused on a measure of growth that strips out government spending, as well as trade and inventory effects. Research from President Barack Obama’s Council of Economic Advisers found that measure, known as “final sales to private domestic purchasers,” to be a better predictor of long-run growth trends.

The Republican tax cuts, which took effect in January, did not have much effect on economic growth in the first quarter. Consumer spending growth actually slowed, and business investment in equipment, which the tax law was meant to encourage, had its weakest showing in a year.

The second quarter could be a different story. Retail sales and other data suggest that consumer spending rebounded, and capital spending has been picking up as well. The tax cuts probably contributed to both trends, although it will be hard to discern exactly how much.

Economists will be watching business investment particularly closely. The Trump administration and its supporters argue that the tax cuts will stimulate investment, which could make the U.S. economy more productive in the long term. Critics argue that companies will mostly return their tax windfalls to shareholders in stock buybacks and dividends, giving the economy the equivalent of a short-term sugar high but doing little for the longer run.

“We have yet to see any meaningful evidence of an increase” in investment, said Joe Brusuelas, chief economist at the accounting firm RSM U.S. “That’s something that you can’t make a judgment on in one or two quarters. That’s something that you make a judgment on in two or three years.”