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U.S. economy posts biggest gain in four years

Will GDP numbers benefit Republicans?

The U.S. economy grew at a strong 4.2 percent annual rate in the April-June quarter, the best showing in nearly four years. Growth stayed on track to produce its strongest gain in more than a decade, with strength in business investment offseting slightly slower consumer spending.

The Commerce Department on Wednesday revised up its estimate of growth for last quarter from an initial estimate of a 4.1 percent annual rate. The second quarter marked a sharp improvement from a 2.2 percent gain in the first three months of the year.  The second quarter GDP number is the strongest figure since a 4.3 percent annual gain in the third quarter of 2014. 

However, some of the strength last quarter came from a surge in U.S exports before tariffs were to take effect--a temporary boost. That included a big jump in soybean exports. 

Economists expect growth to slow to a still solid 3 percent annual rate the rest of the year, resulting in full-year growth of 3 percent for 2018, which would be the best performance since 2005, two years before the Great Recession began. Since the recovery began in mid-2009, growth has been sub-par, with annual gains averaging just 2.2 percent--making it the weakest recovery in the post-war period. GDP gained 1.6 percent in 2016 and 2.2 percent last year. 

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President Donald Trump often pointed to that fact during the 2016 presidential campaign to attack the economic record of the Obama administration. Mr. Trump has touted the recent pickup in GDP as evidence that his economic program of tax cuts, and protectionist trade measures is working. Last month, he proclaimed that the GDP figure showed that the United States was now the "economy envy of the world."

Most economists say that, while solid, growth is being pumped up by the $1.5 trillion tax cut Mr. Trump pushed through Congress last year along with increased government spending. Those factors will begin to fade starting next year. "[G]rowth of above 4 percent is unsustainable and the economy is set to slow somewhat in the second half of 2018," Gus Faucher, chief economist at PNC, wrote in a note. "Overall trade will be a drag on growth through the rest of this year as exports increase more than imports; an escalation in current trade tensions is a significant downside risk for U.S. growth."

The Trump administration rejects that outlook, promising annual growth of 3 percent or better over the next decade.

Wednesday's GDP report showed that consumer spending, which accounts for about 70 percent of economic activity, expanded at a strong annual rate of 3.8 percent in the second quarter, down slightly from an initial estimate of 4 percent growth in consumer spending. But that downward revision was outweighed by other factors including stronger business investment, which grew at a 6.2 percent rate, driven by spending on such items as computer software.

Other sources of strength were less growth in imports, which subtract from GDP, and faster growth in government spending at the federal and state and local levels.