Economic growth probably surged last quarter. If so, expect President Trump and his supporters to crow that Trumponomics has been validated at last.
Which is, obviously, good news! We want the economy to expand more quickly than it has done for the past few years, when it’s puttered along at about 2 percent.
GDP is noisy, bouncing around a lot from quarter to quarter. In fact, while Republicans love to point out that no calendar year during Barack Obama’s presidency reached 3 percent, GDP growth actually did exceed that threshold in eight quarters. Four quarters surpassed 4 percent, and one hit 5.2 percent. (Some of these numbers may look a little different after Friday’s GDP report comes out, since it will include revisions for past years.)
So a single three-month period of strong growth is not exactly unprecedented. It’s also not a sign that the economy is going gangbusters or has been fundamentally transformed. What matters is whether that strong growth is sustainable.
Right now, under Trump’s policies, the answer looks like a big fat no.
There are a lot of idiosyncratic factors that juiced growth last quarter. One is that growth was relatively disappointing at the beginning of the year and was due for a rebound. Again, the numbers are noisy.
But another major factor is that businesses freaking out about Trump’s trade war likely pulled forward some of their activity. That is, as Morgan Stanley chief U.S. economist Ellen Zentner puts it, they “doomsday prepped” by stockpiling raw materials, intermediate goods and finished products before tariffs raised costs on all those things.
Soybean exports surged, for example, as companies raced to beat retaliatory tariffs that went into effect this month. The jump in soybean exports alone probably added 0.6 percentage points to GDP growth in the second quarter, estimates Ian Shepherdson, chief economist at Pantheon Macroeconomics.
We should expect a reversal later this year, as buyers run down their existing inventory rather than place new orders.
In other words, perhaps a bit counterintuitively, the very thing that may make Trump think his trade war is working — unusually strong growth this past quarter — may be evidence it’s about to backfire. At the very least, uncertainty about trade barriers is not helpful for businesses trying to make longer-term decisions about how much and where to invest, plant, hire and so on.
What about Trump’s fiscal policies?
Right now, we’re getting a sort of sugar high from Trump’s tax cuts and spending increases. That may have contributed to second-quarter GDP growth, and will likely lift it throughout this year and next.
But the Congressional Budget Office, the Federal Reserve, the Penn Wharton Budget Model and lots of other private forecasters expect such effects to be short-lived. They generally project higher growth this year of around 3 percent, with output then falling back to a longer-run pace of 1.8 percent or so within a few years. These fiscal policies may be costly, but they’re nonetheless too modest to outweigh the other major structural challenges the United States faces, including our aging population.
The federal debt they generate will also weigh on growth in the long run. And, yes, Trump and tea party confederates are racking up debt big league.
Trump’s own Office of Management and Budget projects that the deficit will reach nearly $900 billion this year and top $1 trillion next year. That’s not even including other new costs on the table, such as a $12 billion bailout for farmers hurt by Trump’s trade war or $90 billion in additional tax cuts the House passed this week.
One last thing to keep in mind if you see high-fives at the White House on Friday: Where are the raises? Output may have swelled last quarter, but paychecks did not. Adjusted for inflation, average hourly earnings were flat in June compared with a year earlier, according to the Labor Department.
If Trumponomics is indeed working, it’s still not working for workers.