Here’s a prediction: You won’t be hearing Donald Trump crowing about U.S. economic growth under his administration, at least not for a while.
Since the presidential campaign, Trump and his minions have been predicting that his policies would bring an increase in annual growth of better than 3% a year. They broke out the Champagne after the figures for the second and third quarter of 2017 showed annualized growth in excess of 3%.
Turns out that was premature. The first reading of real growth domestic product for the fourth quarter of 2017 was published Friday by the government’s Bureau of Economic Analysis, and it shows an increase of only 2.6%. For the whole year, the increase in real GDP is 2.3%. That’s better than the 1.5% growth rate in 2016, the last year of Barack Obama’s second term, but only a tiny hair better than the average over Obama’s full second term.
What’s going to be most interesting about the latest figures is how Trump and his clique will react. I reported in May that Trump was “dreaming” if he expected sustained growth of more than 3% and explained why that was unlikely, though not impossible. After the figures came in for the second and third quarters, my email in-box and Twitter feed filled up with nyah-nyah messages from his fans, who didn’t seem to understand that three months, even six months, of annualized growth of 3%-plus wasn’t the same as 12 months.
This isn’t surprising, coming from the average Twitter tweeter. But the triumphalism also was expressed by some more serious sources. Stephen Moore, for example. Moore is an economic fellow at the conservative Heritage Foundation, a former Wall Street Journal editorial writer, and a familiar face on TV as an economic commentator. He should know better than most that one or two quarters don’t make a year.
Yet in October, after the third-quarter figures showed annualized growth of 3%, he wrote me to ask truculently: “Any retraction coming from your article in the spring about Trump ‘dreaming if he thinks he can get 3% growth’?”
Over the course of a subsequent email exchange, he added: “Every left wing economist was wrong on growth for 2017.” And, “Yes, it is hazardous to read too much into 6 months of data, but wow is this economy sizzling.” And, “I'm just surprised that as a ‘business’ reporter for the LA times you missed the biggest financial story of the last eight years: the Trump moon bounce in the financial markets and the real economy - which is sizzling hot right now after a decade of malaise. But don't feel bad, most in the media and all the liberal economists who you cited missed the call as well.”
I asked Moore after Friday’s fourth-quarter figure was published if he had any further thoughts. He sounded a bit abashed, if one can gauge a state of mind from an email.
“I'm sticking with my 3 percent growth story (that's been about the average over Trump's first three full quarters),” he wrote me. “With tax cut kicking in I'm predicting 3.5 percent for first half of 2018.” He confessed to being “disappointed with 2.6 percent. Ironically by far the biggest contributor to GDP growth was the surge in imports - not sure why that happened. But imports aren't bad so this doesn't concern me. I do like the continued health of business investment - which has surged under Trump.”
Let’s unpack the latest figures and take another look at the headwinds facing the economy.
Friday’s numbers are a preliminary reading of real GDP (that is, compensating for inflation) for the fourth quarter and full year. They’re subject to be revised about a month from now, and again a month after that, though such revisions typically are modest — a few tenths of a percentage point, at most, either way.
The GDP figure is itself a compilation of eight major economic indicators, some of which are influenced more by presidential and government policies than others. They usually don’t move in parallel. In the fourth quarter, the Bureau of Economic Analysis says, growth was spurred by higher personal consumption expenditures, nonresidential fixed investment, exports, residential fixed investment, state and local government spending and federal government spending. Those gains were offset by lower growth in private inventory investment and an increase in imports.
Trump’s economic policy is built around the expectation of sustained growth better than 3%. Indeed, that’s the bedrock of Republican economic policy — economists are almost unanimous in saying that the tax cuts enacted by the GOP-controlled Congress and signed by Trump in December as his only concrete economic policy “win” of the year will have to spur rapid growth if they aren’t to open a gaping hole in the federal deficit.
But few prognosticators on either side of the partisan divide expect GDP growth of more than a couple of tenths of a percentage point to result from the tax cuts. For the most part that expectation is for the very short term. Moore’s forecast of 3.5% growth for the first half of 2018 is at the very high end of the prediction range.
As for the headwinds pushing back, they haven’t changed since I reported on them in May. Strong economic growth depends on growth in the labor force and growth in productivity. Trump asserted that he could improve on the first because — so he claimed — Obama economic policies threw millions of Americans out of work.
But that’s not so. As Trump took office, the slack in the workforce already was minimal. It’s true that the labor participation rate — the share of working-age persons with jobs — was at a mere 63%, down from 66.4% in January 2007. The aging of the U.S. population leaves little hope of reversing the trend line. The last big increase in workforce participation was the product of the baby boom, but those workers are now retiring. I cited a Pew Research Center report that unless immigration takes up the slack by providing 18 million more workers, the U.S. workforce will continue to shrink at least through 2035. Trump immigration policies will keep those workers out.
As for productivity, it’s been declining for many years, and the trend doesn’t seem to be reversing.
It’s fair to say that even annual growth of 2.3% a year isn’t exactly bad. But U.S. growth was outstripped in 2017 by four of the other G7 developed countries. Starting with the best, they were Germany, Canada, France and Britain, according to the World Economic Forum. (The WEF is the sponsor of the big economic powwow currently happening in Davos, Switzerland.) The U.S., furthermore, ranks very low in some measures, especially income and wealth inequality. Low scores on inequality, the WEF warns, “suggest an economy may be storing up problems for the future.”
It’s still conceivable that economic growth will reach 3% or beyond at some point during the Trump administration. Stephen Moore could have the last laugh yet. If there’s a flaw in his forecast, it’s not the pure economics of it, but his insistence on seeing all economic analysis as the product of partisan bias, or more precisely, anti-Trump bias.
But that path leads down a rabbit hole. The truth is that presidents seldom have as much influence over economic cycles as they think, or wish. The U.S. stock market has been strong, but so have the markets in other developed countries. The same goes for GDP. Trump hasn’t actually enacted much in the way of policy that would influence economic growth one way or another, though some recent initiatives, such as placing tariffs on foreign solar panels, might actually suppress U.S. growth. His economic team in Davos communicated a totally confused message on the U.S. dollar — Treasury Secretary Steve Mnuchin at first said the U.S. favored a weak dollar (which suppresses imports and spurs exports, but also could ignite domestic inflation), then walked back his remarks as Trump expressed support for a strong dollar.
The ultimate goal of 3%-plus economic growth? It would be a grand achievement if it happens. But it’s not the way to bet.