“We’ve accomplished an economic turnaround of historic proportions,” Trump said in a speech from the White House Friday.
Compared to the sluggish average annual GDP growth of 1.8 percent since George W. Bush took office in 2001, the White House anticipated the U.S. would meet or exceed 3 percent in 2018, which would be the fastest rate of expansion in 14 years.
“People said 3 percent growth was impossible,” Kevin Hassett, Chair of the Council of Economic Advisers told Sinclair Broadcast Group. “President Trump promised that he’d get you back to 3 percent growth and he’s done it. In fact, he got to four.”
There is a lot to be optimistic about in the latest report from the Bureau of Economic Analysis, particularly against the backdrop of historically low unemployment and optimism among businesses and individuals. There are also a number of questions about whether the second quarter surge was a temporary bump or a sign the economy has kicked into a higher gear.
The latest numbers were buoyed primarily by increases in consumer spending, private business investment, government spending and exports.
On Friday, the president, who took office pledging a return to 4 percent sustained annual economic growth rate, insisted, “These numbers are very, very sustainable. This isn’t a one time shot.”
In the last quarter, GDP growth only hit 2.2 percent. In Trump’s first year in office, annual GDP growth was 2.3 percent, only slightly higher than average annual growth during Barack Obama’s second term.
“I’m going to need to see a sustained period of higher than trend growth before I declare with any certainty declare anything different has happened here,” said Josh Bivens, director of research at the Economic Policy Institute. Moreover, since the economic recovery began in mid-2009, there have been four quarters where gross domestic product peaked above 4.1 percent, leaving economists like Bivens unconvinced.
According to Aparna Mathur, an economic policy scholar at the American Enterprise Institute, Friday’s report clearly shows the economy is gathering momentum, but it is not a guarantee of continued 4 percent growth in each quarter going forward.
More likely, the growth rate was a “temporary reaction” to shorter-term policies, specifically the trade tariffs and increased government spending. “That surge is therefore likely to weaken over time,” Mathur explained.
In his address Friday morning, President Trump cited the $52 billion drop in the trade deficit as “one of the biggest wins in the report.” That surge in U.S. exports contributed nearly a full percentage point to the GDP figure, but it may have been the macroeconomic equivalent of stockpiling goods before a storm.
According to some reports, the 9.3 percent jump in exports was likely propped up by a rush to buy up U.S. goods before retaliatory tariffs went into effect.
If that is the case, it could be a sign that the next report won’t be as strong, said Adam Michel, an economic policy analyst at the Heritage Foundation. “That’s the fear, that the trade concerns are making the number look different than it otherwise would,” he noted. “But the rest of the fundamentals are there.”
GROWING THE BASE
The White House had a different interpretation of the export surge, saying the figure reflected U.S. businesses expanding production facilities, plant and equipment.
“People are bringing their factories back home,” Hassett said, pointing to a significant 9.4 percent increase in private business investments in the first half of 2018.
Those business investments, combined with low unemployment, record-high optimism among manufacturers and strong private sector confidence, suggest the economy is moving toward a longer-term boost in overall productivity, Michel said.
Consumer spending, which typically contributes the most to GDP, was another element of the Friday report that could also suggest a more sustained pattern of growth.
Consumer spending was at its strongest level in four years and it was supported by a promising report on consumer sentiment, which recently hit its highest level in 18 years. Consumer comfort, another measurement of general optimism about the economy, also rose to its highest level since February 2001.
The government also revised recent years’ statistics on Friday, showing Americans have been saving more than previously reported. Many have seen this as another positive sign, though the latest GDP report showed consumer savings slowed in the second quarter by nearly one half.
One question mark looming over consumer behavior is the apparent mismatch between how much Americans are spending and their weak earnings and personal savings.
Even with the economy near full employment, workers’ wages have remained relatively flat. Mathur suggested the second quarter shopping spree likely points to workers’ “general optimism” that higher wages may be right around the corner.
CREDIT WHERE CREDIT IS DUE?
Opinions tend to vary widely when it comes to President Trump’s personal responsibility for the economic gains, or the role of any single president in steering the $20 trillion tanker known as the U.S. economy.
At least three of Trump’s policies likely contributed to Friday’s figures:
- Tariffs
- Tax cuts
- Trillion-dollar government spending deal
Bivens was skeptical that President Trump’s policies had moved the needle on gross domestic product, again citing average growth figures that differ little from those during Barack Obama’s years in office. “It’s just not really different from the trend he inherited,” he said.
Still, a number of economists and CEOs have attributed recent investments and hiring to Trump’s tax reform and regulatory reform.
For the typical American, many have seen more money in their paychecks as a result of a lower individual tax rate. Mathur advised it may be “a temporary fiscal stimulus,” as those individual benefits are set to expire in 2021. If those benefits are extended, as Republicans in Congress and President Trump have said they intend to do, that could help sustain the rate of consumption.
Government spending, another core element of GDP, also increased by 3.5 percent with defense spending up 5.5 percent. This boost is likely tied to the $1.4 trillion two-year budget deal passed by Congress in February.
The budget deal and the more than 10 percent boost in U.S. military spending may have contributed to Friday’s GDP figures, but it could also lead to problems in the future. Eventually, someone will have to pay the piper, reduce the deficit and pay for future spending, which could put constraints on economic growth.
