US economy surprises on upside, but trade war risk looms

The US economy grew at a faster rate than previously thought last year, according to the latest data. 

New figures from the Commerce Department showed that the US economy grew by 2.9 per cent in the fourth quarter of 2017, an upward revision from the previous estimate of 2.5 per cent increase and higher than the 2.7 per cent revision figure economists had expected.

Being a revision of already strong growth figures, markets barely reacted, with US indices yesterday (28 March) closing higher by only marginal amounts.

The stronger than expected growth figures pushes the US economy further along the road of one of its longest ever economic expansions. This goes against dour predictions made last year by various commentators, who predicted the US was at the peak of its economic cycle and therefore growth would soon contract, in turn bringing markets down with it. 

However, despite the recent upward revision of growth, current growth rates are well below historical norms. 

As the graph below shows, the US post-great recession expansion has seen some the historically weakest growth in the expansionary phase of the economic cycle. 

While the US is in in the midst of the one of the longest economic expansions on record, it is also the most subdued in terms of growth rates. The weak growth has allowed, and should in theory allow, the current economic cycle to continue upward for longer. 

-Trump trade war hits Japan – but investor sentiment was already weakening

As the graph shows, the relatively weak growth rate over the past nine years has meant that the cumulative GDP growth for this period has been just 20 per cent. This, according to John Burns Real Estate Consulting, means that the current expansion still has a way to go. The current expansionary stage in the cycle is predicted to last until at least 2020, adding a cumulative 27 per cent to the US economy. Potentially lasting 11.5 years, it would be the longest expansion on record.

Of course, while the current historically low growth rates would allow the US’ economy to continue to expand, that’s not to say that there aren’t risks on the horizon.

Chiefly, the looming trade war between Washington and Beijing. While Trump’s steel and aluminium tariffs were likely to negatively hit some firms, their overall macroeconomic impact was likely to be weak. However, the administration’s recent unveiling of more tariffs on Chinese imports, ranging from aerospace, information tech to machinery, are likely to hit the US economic harder – especially as the Chinese government responds in kind. 

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