US economy accelerates

The second quarter should be even more robust. The Atlanta Federal Reserve Nowcast on May 30 estimated that growth for the second quarter will be 3.8pc We think this acceleration happens for two reasons. The first is a surge in domestic consumption. This is particularly true of consumer durables. Consumer durables are things that hurt when you drop them on your foot. Examples include automobiles, firearms and furniture.

The second is a continuation of non-residential construction in the mining and petroleum sector. Our estimate is that the US economy will grow by 3.4pc for the second quarter. The stronger numbers that have been observed by the Atlanta Fed, have also been observed elsewhere in the Federal Reserve System. The Chicago Fed National Activity Indicator for April rose to 0.49, up from the level of 0.07 in March.

The three-month moving average of the Chicago Fed National Activity Indicator saw a rise to 0.23 in April from 0 in March. We have found that a reading of 0 for the three-month moving average is consistent with a year on year growth rate for US GDP of 2.43pc. The Chicago Fed tells us that 0 is also equal to the long-term trend growth of the US economy.

We think that the third quarter will also be very strong. We expect growth of around 3.0pc. We expect in the third quarter to see an increase in aircraft construction. A stronger US economy is generating stronger demand for US aircraft.

Our estimate for the fourth quarter is that growth should soften to around 2.5pc. This should give us a result for the full year of around 2.4pc. This is significantly stronger than the 1.6pc growth rate for 2016.

What we are seeing here is a cyclical recovery. We do not think that the positive effects of a ‘Trump-bump’ for the economy are yet occurring. We are seeing a normal cyclical recovery from a ‘soft landing’ or growth recession in 2016.  A stronger US dollar in 2016 led to lower oil prices. This in turn led to lower investment and lower growth. Now that the US dollar has stabilised, we have seen a recovery in oil prices and stronger investment.  This is the real basis of stronger growth in 2017.

The prospect of stronger growth under the Trump administration or a real ‘Trump-bump’ must await the passage of tax reform legislation. A cut in the US corporate tax rate in 2017 will generate stronger US corporate investment in 2018. This stronger level of US corporate investment should lift GDP growth again in 2018.  We estimate that US growth in 2018 should be around 2.7pc.