Everythings Bigger In Texas

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What's going on?

The US economy grew by over 4% between April and June the fastest rate since the end of 2014 making the US a $20 trillion economy (the first ever).

What does this mean?

All of the cylinders in the US economic engine were firing in the second quarter with exports driving a substantial part of the acceleration most notably soybeans (theyre less innocuous than they look), which are subject to looming tariffs from China. Another key component of the US economy is consumer spending people buying things like food and clothes which also showed strong growth.

Why should I care?

For markets: The prospect of interest rate rises looms large.

An economy going swimmingly is clearly good news, but it does mean that interest rate rises could become more likely to stop things turning sour. People spending more drives up inflation a.k.a. the cost of goods (as demand outstrips supply), meaning buying the same stuff becomes more expensive and eats into your income. Higher interest rates mean your money in the bank gets more bang for its buck, which should make people more likely to save than spend. The US Federal Reserve already raised rates in June and said it expects to make at least two more hikes by the end of the year.

The bigger picture: Dont sound the Trump-ets just yet.

Businesses abroad might have been buying extra soybeans prior to tariffs being put in place in order to get lower prices while they can, and tax cuts have been incentivising other expenditure in the economy (less tax means more money to spend). The growth of consumer spending has been partly because people are saving less (rather than because theyre earning more). Stocks fell by 1% on Friday, perhaps as investors questioned whether these boosts to the economy are a one-hit wonder or more enduring.

Originally posted as part of the Finimize daily email.

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