As one might expect, President Trump was crowing Friday about the initial reading of growth in the gross domestic product. The figure came in at an annualized 4.1%, the highest rate since the third quarter of 2014.
Trump said he was “thrilled” by the figure, which he called an “amazing rate.” He said that as “trade deals come in one by one, we’re going to go a lot higher than these numbers, and these are great numbers.”
Um, not so fast, guys. Even the reports that placed the most positive spin on the GDP figure hastened to warn that a hangover might be coming, or gave the longer-term context of this one quarterly report. But they put those caveats in the second paragraph or lower — and as the newspaper editor played by Cary Grant in the classic movie “His Girl Friday” put it, “Who reads the second paragraph?”
So although we’re already on paragraph five, here’s some necessary context.
To begin with, let’s recall that on the campaign trail, Trump promised growth of 3.5% a year, and sometimes even 4%. That’s sustained, annual growth, not annualized growth for a single quarter. He still hasn’t delivered on that promise. Looking back over the last 12 months, real GDP has grown by 2.85% in a year.
As we reported in May 2017, economists agree that a sustained growth rate of 3.5% or higher would be a significant achievement. They also agree that it will be extremely difficult to achieve, given obstacles that include a workforce nearing full employment and a slowdown in productivity.
In any case, a 4.1% annualized growth rate isn’t only not “amazing,” it’s not even particularly remarkable. The Obama administration reached it in four quarters, including one with an annualized rate of 5.1%. Despite that record, the economy never grew at an annual rate of 3% during those eight years. Trump’s second-quarter GDP growth would rank only fifth among Obama’s quarters.
What about the prospects for the future, of which Trump spoke so effusively? Economists aren’t so sanguine. The second-quarter growth rate, several have pointed out, is based on not a few one-off phenomena. If they revert to the mean, the third-quarter growth rate will come in much lower, possibly below 3%, annualized.
As we observed only a few days ago, the developing headwinds include the tariff wars triggered by President Trump; a slowdown in consumer spending as the impact of the tax cuts ebbs; a pullback in government spending; and a decline in imports, which jumped in the wake of last year’s hurricanes. Second-quarter agricultural exports were goosed by soybean buying by Chinese customers trying to build stockpiles in advance of tariffs; that will disappear.
Thus far, there’s no evidence that the Republican tax cuts enacted in December have trickled down to the average American. Interest rates are on the rise — indeed, the strength of the second-quarter number will probably encourage the Federal Reserve to stick to its plan for at least two interest-rate hikes during the rest of this year — and that will suppress big-ticket consumer buying. Home sales already are slowing markedly.
A 4.1% quarterly growth figure is certainly positive. The question is whether it’s sustainable, which must happen if Trump is going to make good on his claim that the massive tax cut, which went almost entirely to the affluent and to corporate shareholders, will pay for itself.