Why the Trump economy will go bust
Sound the trumpets! Cue the balloons! President Trump finally hit his economic growth target on Friday.
Trump has long boasted he can push the economy to 3 percent growth or more over the long term. Needless to say, he and the rest of the White House were thumping their chests when the government's latest numbers showed a whopping 4.1 percent rate in the second quarter. It was a big increase over the first quarter, which saw mere 2.2 percent growth. "We are now on track to hit an average GDP annual growth of over 3 percent and it could be substantially over 3 percent," Trump said.
"This isn't a one-time shot," he added, a prediction echoed by the director of his National Economic Council, Larry Kudlow, who claimed, "This is a boom that will be sustainable, frankly as far as the eye can see."
But neither Trump nor his team should count their GDP numbers before they hatch.
Obviously, a 4.1 percent rate of GDP growth is welcome news. But economic statistics are also full of noise. Were Friday's numbers a blip or a sign of a new trend?
Trump and his supporters of course claim they made this happen: Under the president, the Republicans have gone on a deregulatory spree and passed a massive tax cut. And while his party isn't exactly thrilled with it, there's also Trump's burgeoning trade war.
But has any of this translated into real, fundamental differences in the economy's performance?
It's difficult to see any evidence. Job growth remains modest but steady. Nominal wage growth is there, but it's mediocre. And this has literally been the story for years and years, well before the arrival of Trump or the current Congress.
Paradoxically, the recovery from the Great Recession has been one of the most anemic-yet-dogged in American history.
This is especially noteworthy when it comes to the Republicans' tax cut. Their theory was that by making investments more profitable, the tax law would encourage more investment and thus boost growth. This never made much sense: Investment in the U.S. economy has been crumbling for decades even as corporate profits soared to new heights. Sure enough, post-tax cut, the glut of shareholder payouts has continued, but there's no sign of a pickup in investment. In fact, the same Friday report that showed high economic growth also revealed the slowest growth for equipment investments since late 2016. Whatever boosted GDP in the second quarter, it wasn't that.
A more likely culprit is in fact Trump's trade war. But not in the way the president would want.
America's trading partners, particularly China, are gearing up to retaliate against Trump with tariffs of their own. Like shoppers stripping grocery shelves bare in anticipation of a hurricane, it looks like foreign buyers cranked up their purchases of American exports in the second quarter to get them in before the crackdown arrived. For instance, U.S. soybean exports — which are now getting hit hard by the trade war — were up over 50 percent. All told, the sudden surge in American exports accounted for half of the 4.1 percent GDP growth rate.
Analysts at Morgan Stanley said it was "likely a reflection of stockpiling ahead of the implementation of trade tariffs, and so they are likely to subtract from growth in the following quarters." In other words, Trump's policies didn't drive that growth so much as inspire a foreign freakout that injected more demand into our economy from abroad. And because it happened in anticipation of a trade war that's now here, the temporary boom will almost certainly be followed by a bust.
Did Trump and the Republicans do anything right?
Well, they did include some tax relief for working people in their recent tax cut package. And one measure of consumer spending in the economy increased by 4.3 percent in the second quarter, compared to 2 percent in the first. "Consumers got a decent amount of cash after the tax cuts," Joseph Song, a senior Bank of America economist, told The New York Times. "We are starting to see some of that play out." Those tax cuts for regular Americans were basically thrown in as political sweetener, to distract from the fact that the vast majority of the benefits went to the wealthy. Ironically, that sweetener is now the only part of the package doing any noticeable good.
It turns out federal spending also grew by 3.4 percent in the second quarter — thanks to a recent budget deal — and that probably also boosted growth. Again, this is ironic, as the Republicans tend to rail against increased government spending whenever they're out of power.
In other words, to the extent Trump and his people did do something right, it was by stealing from the progressive playbook.
Will the boost to government spending or consumers' wallets continue? That depends on future policy choices. But it looks like Trump and the Republicans are hunkering down for a holding pattern at least until after the midterms. Then who knows what will happen.
Meanwhile, the jump in U.S. exports will likely fall back next quarter. And the business side of the tax cut package will likely continue to deliver not much of anything. Trump could also make things worse if he escalates his trade war.
Finally, Trump's Federal Reserve has been another study in continuity, rather than rupture, with the Obama years. But if Fed officials get spooked — including by the president himself — they could hike interest rates faster and put the squeeze on growth.
Trump and his people may be enjoying the economy's breakneck growth right now. But pretty soon, it will hit the skids.