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U.S. economy surges to 4.1% growth rate. Trump thinks it'll continue. Economists disagree

U.S. economy surges to 4.1% growth rate. Trump thinks it'll continue. Economists disagree
Consumer spending in the second quarter soared to a 4% annual rate. Above, a Walmart store in San Leandro on June 14. (Yichuan Cao / TNS)

The nation’s economic growth surged this spring to top 4% for the first time in nearly four years, but analysts have some advice: Enjoy it while you can.

The U.S. economy probably won’t do that again for a while.

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Although President Trump promised that the “amazing” second-quarter figure “isn’t a one-time shot,” an unusual combination of factors from April through June led to the strong 4.1% annual growth rate reported Friday by the Commerce Department.

Stimulus from the large Republican tax cuts that took effect on Jan. 1 finally filtered into the economy, leading consumers to spend at a quarterly pace that hadn’t been seen since 2014.

On top of that, exports of U.S. goods grew at a stunning 13.3% annual pace, the fastest in almost five years, as U.S. businesses apparently rushed to deliver their products before tariffs from other nations kick in amid simmering trade disputes.

Foreigners snatched up U.S. soybeans this spring after China’s move to put tariffs on them roiled global supply chains. U.S. soybean exports nearly doubled in May from the previous month to $4.14 billion.

“This is not amazing,” Mark Zandi, chief economist at Moody’s Analytics, said of the strong economic data. “This is a mirage.”

“It doesn’t take a genius to figure out how to juice up growth: you borrow money and cut everyone a check,” he said. “A year from now or two years from now, there is a very dark side to all of this, and we will see it.”

The extra economic stimulus is driving up the risk for a recession in 2020, Zandi said. Longer term, the tax cuts are projected to add $1.5 trillion to the deficit over the next 10 years.

But in the short term, the stimulus has worked.

Though it was below analysts’ expectations of 4.4%, the latest report on total economic output, also known as gross domestic product, was undeniably strong. The last time the U.S. economy topped 4% annualized growth in a quarter was in 2014, when the figure was 4.9%.

(Los Angeles Times)

Some of the second-quarter gains were makeup for a mediocre first quarter. The economy grew at just a 2.2% annual rate in January through March, a figure that was revised upward by 0.2 percentage points by the Commerce Department on Friday.

The first-quarter performance was down from the end of last year, a surprise result given the tax cuts. But it apparently took a while for larger paychecks and one-time bonuses from companies to filter into the economy.

Consumer spending in the second quarter soared 4% on an annual basis, after inching up only 0.5% in the first quarter.

Exports of goods and services also surged in the second quarter, growing at a 9.3% annual rate, way up from 3.6% in the first quarter.

The growth rate of capital expenditures outside of the housing industry, a key measure of business investment, slowed in the second quarter to 7.3% from 11.5% in the previous quarter. But that is still considered strong, and was boosted by lower tax rates and higher energy prices that have lured more investment in oil and natural gas mining.

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“It’s a very nice quarter,” Aaron Anderson, senior vice president of research at Fisher Investments.

President Trump was much more impressed. He gathered top administration officials on the South Lawn of the White House Friday morning to tout the report.

“We’ve accomplished an economic turnaround of historic proportions,” Trump declared, though growth this year is on pace only to be marginally above the 2.9% achieved just three years ago in 2015.

Trump and Republicans criticized President Obama for not having a single calendar year in which economic growth hit 3%, although there were three 12-month periods under his administration when growth reached that level.

For the first half of 2018, the U.S. economy grew at a rate of 3.1%.

“These numbers are very, very sustainable,” Trump said, flanked by Vice President Mike Pence, Treasury Secretary Steven T. Mnuchin, Commerce Secretary Wilbur Ross and other administration officials.

“I happen to think we’re going to do extraordinarily well in our next report,” he said.

Most economists don’t agree.

A poll of 55 economists released this week by Reuters found that they believe economic growth will be slower in the second half of this year as the stimulus effects from the tax cuts wear off over the next few quarters.

And the Federal Reserve — despite Trumps protests — is likely to continue increasing its benchmark interest rate. The move, designed to stave off high inflation, would make borrowing more expensive and slow down growth, analysts said.

Add in trade tensions between the United States and some key trading partners, and that would mean the tax cuts could fall short of the economic “rocket fuel” predicted by Trump and Republicans when they pushed through the legislation.

Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics, noted that economic growth began improving in mid-2016, before Trump won the presidential election.

“We see no signs of an upward inflection” caused by the administration’s policies, he wrote in a research note.

He forecasts growth to slow in the third quarter to 3%.

Anderson also doesn’t think the 4.1% growth can be sustained.

“This is a good economic environment that has stable growth and low inflation,” he said, but added: “I don’t see this marking a point where we’re in for high 3% to 4% growth persistently into the future.”

As Congress finished work on the tax-cut legislation in December, Trump said U.S. economic growth “could go to 4, 5 or even 6%, ultimately.”

Since then, his advisors have lowered those estimates.

Last week, Larry Kudlow, director of the White House’s National Economic Council, predicted that the annual growth rate might hit 4% “for a quarter or two.”

The annual Economic Report of the President, released in February, forecast 3.1% growth this year, increasing to 3.2% next year. Growth would be at least 3% a year through 2024. But those forecasts are higher than others. The Congressional Budget Office estimated 3.3% growth this year, dropping to 2.4% in 2019 and 1.8% the following year.

Federal Reserve policymakers said in June that they expected 2.8% growth this year, declining to 2.4% in 2019 and 2% the year after that.

Muddying the waters is the government’s growing budget deficit.

On top of the tax cuts, Congress and the White House enacted a $1.3 trillion spending bill that blows through existing budget caps for military and domestic expenditures. That was reflected in a 5.5% increase in government defense spending in the second quarter, up from 3% during the first three months of the year.

For those reasons, the deficit is expected to increase to $804 billion this fiscal year — $139 billion more than the estimated amount before the tax cut and budget bills were signed, according to the nonpartisan CBO.

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The deficit will top $1 trillion in 2020, the CBO said. The deficit was $620 billion in 2016, President Obama’s last year in office.

Zandi warned a reckoning is coming from the large deficit-financed stimulus at a time the economy already has been expanding for several years.

“The recession odds are very high for 2020,” he said.

“This is classic business cycle. We’ve seen it 10 times since World War II,” Zandi said. “It will end the same way the 10 other cycles have ended, very likely in a recession.”

2:30 p.m.: This article was updated with comments from analysts.

7:10 a.m.: This article was updated with comments from President Trump.

6:20 a.m.: This article was updated with staff reporting and analysis.

This article was originally published at 5:40 a.m.

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