President Trump called it “not bad” growth in a tweet Friday morning and predicted the economy is “set to zoom” going forward, though many economists predict this year will be solid but not extraordinary.
“Last year was a fiscal sugar rush. This year it’s starting to fade,” said Michael Feroli, chief U.S. economist at J.P. Morgan.
Consumer and federal government spending accounted for the bulk of U.S. growth: Americans bought heavily again in the spring; and federal spending surged after the partial shutdown in the first quarter. Business spending dried up, however, turning negative for the first time since early 2016. Many executives blame uncertainty around Trump’s trade war for their hesitancy to spend as much as they did a year ago.
Trump has promised his policies will achieve more than 3 percent growth for years to come. Last year, he nearly achieved that goal, with an official growth rate of 2.9 percent. Trump has boosted the economy with an unprecedented amount of stimulus at a time when unemployment is very low.
He increased military and domestic spending, scaled back regulations and enacted the largest corporate tax cut in the country’s history.
The tax cut for businesses was supposed to spur companies to invest in new properties, equipment and products, but after a bounce early last year, businesses have pulled back on spending. Nonresidential fixed investment fell sharply to -0.6 percent during the quarter, and spending on new structures plummeted to -10.6 percent.
The White House argues that Trump’s policies have enabled millions more Americans to get jobs and receive higher pay through tax cuts and a strong labor market that has forced companies to boost wages. That, in turn, has helped raise consumer spending, said Larry Kudlow, Trump’s chief economic adviser.
Kudlow called consumers “heroes” on Friday and blamed the slowing economy momentum on the Federal Reserve, which raised interest rates four times last year and has been a near-constant target of Trump’s ire.
“We had to suffer through severe monetary tightening,” Kudlow said on CNBC. But he predicted a strong second half of the year. “We are the hottest economy in the world, and I expect us to stay that way.”
Kudlow’s remarks echoed Trump’s tweet that growth was “not bad considering we had the very heavy weight of the Federal Reserve anchor wrapped around our neck.”
The Fed is almost certain to lower interest rates at the conclusion of its meeting next week, but the central bank has been hinting since early June that the cut is coming, which many say is a key reason that stocks hit record highs again and business sentiment has rebounded somewhat.
“In many ways, we’ve already reaped the benefits of a Fed cut,” said Diane Swonk, chief economist at Grant Thornton. She pointed to record stock prices, more mortgage refinancing and a rebound in spending as evidence the Fed’s more “dovish” stance has had an impact.
Few are predicting a recession anytime soon. The nation is in the midst of the longest expansion in U.S. history, growing for more than a decade and exceeding even the 1990s boom.
While some have questioned how much longer the expansion can last, it is showing little sign of weakness so far. Most experts say it will take a major event of some sort to knock the economy off course.
“Expansions don’t die of old age. I like to say they get murdered,” said Ben Bernanke, an economist and former Federal Reserve chair, earlier this year.
Newly released data from the Commerce Department shows it is likely that growth peaked in the middle of last year and then momentum cooled heading into 2019. The White House has discussed ways to potentially boost the economy further, including possibly trying to devalue the U.S. dollar to make American goods more competitive overseas. But Kudlow said that was ruled out.
The bearish case is that businesses are pulling back on spending because of trade uncertainty, and if that spills over to a pullback in hiring, that could spook consumers and cause them to close up their wallets. But many forecasters don’t believe that scenario is likely to unfold in the next year.
If the economy continues to grow around 2 percent, that should be enough to justify adding more jobs and increasing pay for many workers, which fuels consumer spending.
“I don’t see any warning signs right now,” said Ben Herzon, executive director of U.S. economics at Macroeconomic Advisers. “It’s hard to be against the economy when the consumer is in such good shape.”