It’s not a fluke: This economy is really strong
The US economy grew 4.1 percent during the second quarter, the Commerce Department said Friday, a healthy clip that suggests the recovery may be accelerating after nine years of slow but steady improvement.
The government’s report on gross domestic product — a measure of all goods and services produced — was closely scrutinized for signs of how President Trump’s tax cut and tariff skirmishes are affecting the economy. The tally for April through June marked a significant pickup from the 2.2 percent annual growth rate in the first three months of 2018.
Analysts said the economy’s performance was strong though not unprecedented; the GDP jumped 4.9 percent as recently as 2014. And it didn’t seem to be a statistical fluke.
Two-thirds of the growth can be traced directly to increased consumer spending, a positive indicator of household income and optimism.
Another driving force was a surge in exported goods, something the United States has struggled with in recent years. This could be an early sign of shifting global trade dynamics. But Brad Setser, a senior fellow in international economics at the Council on Foreign Relations, said via Twitter that it partly “looks like a ‘beat the tariff’ export surge,” with businesses rushing to ship product ahead of Trump’s trade war.
This isn’t just the story of a few good months. Friday’s release reached back in time and made the first quarter better, too. Perhaps the best way to see this is by noting the 3.1 percent growth rate you get by averaging of GDP (how much the United States produces) and GDI (how much Americans earn). Many economists consider this combined metric more accurate, though it doesn’t get as much attention because it comes out with a one-month lag.
The $20 trillion question — that’s the record-breaking size of the current US economy — is whether the United States can sustain this heightened pace of economic growth.
Forecasters aren’t optimistic, with the Wall Street Journal’s survey of economists indicating a likely drop-off to 3 percent growth in the third quarter and 2.9 percent in the fourth.
The antideficit Committee for a Responsible Federal Budget agreed, saying that Friday’s numbers were “not representative of likely growth over the course of the next year, let alone the next decade.”
Investors weren’t cheered either, as markets fell Friday despite the strong report. Partly, that’s a matter of disappointed expectations, as many hoped that the growth rate would be even higher. But the bigger issue is the looming prospect of stiff new headwinds, including the Federal Reserve Board’s plans to raise interest rates as many as five times before the end of 2019, which could curb borrowing and hurt growth.
Then there’s the potential fallout from Trump’s tariffs, which are still ramping up. A closely watched survey from the University of Michigan, also released Friday, found a dip in Americans’ economic outlook, closely tied to fears of widening tariffs. And more businesses are finding their profit margins thinned by trade restrictions.
Even the uptick in consumer spending may not be a reliable sign of things to come. Instead, it could be a one-time reaction to the Trump tax cuts, which started trickling through to paychecks earlier this year and which aren’t set to grow any bigger.
Champions of the tax cuts hoped for a more durable impact, but as yet there’s no sign of that. Yes, those cuts were pitched as a way to turbocharge economic growth — and, yes, growth does seem to be juiced — but the two aren’t connected in the way boosters expected.
Central to the tax cut story was that reducing the corporate tax rate would free businesses to expand productivity-enhancing investments in things like new facilities and advanced robots. That way, workers could make better use of their time and warrant better pay.
Trouble is, those investments haven’t materialized. Business spending on structures, equipment, and intellectual property grew 7.3 percent in the second quarter, which is good but in line with spending levels before the tax cuts.
Meanwhile, real wages have risen a tragic zero percent in recent months, which highlights the disconnect between struggling US workers and a US economy growing at a healthy 4.1 percent.
This is a well-known problem with GDP. It tell us how fast the economy is growing, but nothing about who enjoys the fruits. Beyond which, it doesn’t reflect environmental costs or the value of stay-at-home parenting, even as it gives credit for the sale of stolen goods.