Trump cannot take all the credit for US growth

Economic growth surged last quarter in the United States. Unsurprisingly, President Donald Trump and his supporters were quick to crow that this means Trumponomics has been validated at last. But that probably is the exact opposite lesson Trump, and everyone else, should take from the numbers.

On Friday morning, we got an update on how the US economy, as measured by gross domestic product, is faring. And the news was encouraging: In the second quarter, the economy grew at a seasonally adjusted annual rate of 4.1 per cent.

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 per cent.

But there are a lot of reasons not to read too much into one quarter of strong growth — or interpret it as evidence that Trump’s tax cut and trade war are good things.

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 per cent, GDP growth actually did meet or exceed that threshold in 12 quarters. Four quarters surpassed 4 per cent, and one hit 5.1 per cent. 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 US economist Ellen Zentner puts it, they “doomsday prepped” by stockpiling raw materials, intermediate goods and finished products before tariffs raised costs.

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 stockpile 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 — particularly given the strong consumer spending numbers — 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, with output then falling back to a longer-run pace of 1.8 per cent or so within a few years.

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: Where are the raises? Output may have swelled last quarter, but pay cheques did not. Adjusted for inflation, average hourly earnings were flat in June compared with a year earlier, according to the US Labour Department.

If Trumponomics is indeed working, it’s still not working for workers.

Right now, we’re getting a sort of sugar high from Trump’s tax cuts and spending increases