President Trump has made second-quarter economic growth great again for a bad reason that we expected, and a good reason that we didn’t expect — which is to say that it wasn’t the one Republicans were hoping for.
Friday’s headline number that the U.S. economy grew 4.1 percent in the second quarter was deceiving, but not quite as much as people had thought it would be. On the one hand, the number reflected an aberration because people overseas were rushing to buy up American goods — in particular, soybeans — before other countries' retaliatory tariffs made those things more expensive for them. The threat of a trade war, then, made the economy grow at a faster pace today at the expense of tomorrow. So if you take out those export numbers that are always erratic and in this case misleading, the rate of growth would have been a little over 3 percent this quarter — still very good, but not exactly the throw-a-parade level that the administration is touting.
On the other hand, however, the economy does seem to have a lot of underlying strength -- just not in the way that Republicans had predicted.
See, the whole idea behind Trump’s big corporate tax cut was that it would make businesses invest a lot more in the kind of plants and machinery that would create not just jobs but more productive jobs that would eventually lead to higher wages. So far that hasn’t really happened. While nonresidential fixed investment grew a respectable 7.3 percent in the second quarter, this was actually slower than it did at the start of the year. In the last 12 months, it’s only up about 8 percent -- a little less than it was in 2014 and a lot less than in 2012. That’s not to say that there won’t be an investment boom, just that there hasn’t been one yet.
What’s happened instead is that consumers have remained the engine of our economic growth. Specifically, personal consumption added 2.69 of the economy’s 4.1 percentage points of growth in the second quarter, and it did this despite the fact that new data revisions showed the savings rate was almost twice as high — 6.7 percent instead of 3.4 percent — as we thought it was. That tells us that households should be able to keep spending and that the economy should be able to keep growing pretty well for the rest of the year.
An even better way to determine that, however, is to look at what’s called final sales to private domestic purchasers. That measure takes out the most volatile parts of GDP — exports, inventories and government spending — to give us a better idea of how sustainable economic growth really is by looking only at consumption and non-inventory investment. Indeed, as Jason Furman, chair of the Council of Economic Advisers during the Obama administration, points out, this formula predicts future GDP growth better than today’s GDP growth does. And by that measure, the rest of 2018 looks like it might be quite strong: Final sales to private domestic purchasers were up 4.3 percent in the last quarter and 3.2 percent in the last year.
The real takeaway, then, is that the Trump tax cuts might be working in a different -- and more negative -- way than they were supposed to. Instead of boosting long-term investment by giving companies an incentive to use their tax savings to improve their businesses and pay better wages, the Trump tax cuts might simply be boosting short-term consumption while companies mostly pay their money out to shareholders.
If that’s true, Trump won’t make America’s growth rate great again for very long -- only a year.