Human beings have two growth spurt phases. When we are young growth spurts are exciting times when we grow taller, catching older siblings or adults in height. When we become adults, growth spurts take on a whole new meaning. Rather than growing taller, our growth takes us in different directions that aren’t always favorable.
The United States appears to have experienced a major growth spurt in the second quarter. Major economic forecasting firms are estimating Gross Domestic Product (GDP) growth in a range of 3.8%-4.8% year-over-year. The Wall Street Journal reported that the second quarter of 2018 could mark the strongest economic growth since third quarter 2014, when the economy expanded at a 5.2% annualized rate. Additionally, analysts at S&P Dow Jones Indices estimate operating earnings per share to grow 26.7% year-over-year in the second quarter.
GDP growth is being driven by strong exports, inventory investment and spending by consumers, businesses and government. A surge in exports might be a response to potential tariffs that could be enforced by foreign governments. Businesses may be trying to move goods into another country before it becomes more expensive.
Operating earnings per share growth continues to be driven by tax cuts implemented in the fourth quarter. Higher sales also continue to drive earnings higher. All sectors of the economy seem to be benefiting from these favorable tailwinds.
A growth spurt is positive for overall long-term economic and earnings levels. However, the question is, “How long can the growth spurt last?” Growth driven by potential tariffs and tax cuts is not sustainable. These one-time items create a difficult environment to decipher what the true, sustainable growth rate will be for 2019.
Analysts will be watching closely to see how companies decide to use these funds. Potential uses are technological advancements, opportunity for further research and development, and the possibility of paying talent a larger sum. Each investment option comes with its own unique outcomes.
Time will tell whether this current growth spurt is part of the 10-year recovery and expansion period that the U.S. has enjoyed or, whether we are experiencing a more mature type of growth spurt that may require greater adjustments to sustain. For the moment, it is nice to enjoy the momentum and profit from positive bottom line results.