Hopes of ‘Trump Bump’ for economy shrink as growth forecasts fade

The promise of faster economic growth has become a study in the triumph of hope over experience.

While the June jobs report, coming Friday, is expected to show that hiring continued at a healthy pace last month, other recent indicators in areas like consumer spending, construction and auto sales have been decidedly less robust.

As a result, Wall Street forecasters have been busy lowering their growth estimates for the second quarter, which ended Friday, much as they were forced to do over the first three months of the year. Economic expansion for the full year now appears unlikely to be much greater than 2 percent — about the average for the current recovery, which celebrates its eighth year this month.

While hardly terrible, it is not the burst of growth — a “Trump bump” — that many expected to result from an upturn in consumer and business sentiment after President Trump’s election.

Trump himself declared upon taking office that his policies would produce 4 percent annual growth, and just this week said on Twitter that “things are starting to kick in now.”

But the Federal Reserve Bank of Atlanta’s widely followed GDP Now forecast expects the second-quarter growth figure to come in at 3 percent, more than a full percentage point below where it was in May. The New York Fed’s Nowcast is even more bearish, with an estimate of 1.9 percent for the quarter just ended and 1.6 percent for the current quarter.

“We never seem to have the rebound that people anticipate,” said Stephanie Pomboy, an independent economist in New York who has been skeptical about initially rosy forecasts favored by many of her colleagues in recent quarters.

The fading expectations for the current quarter are only the latest example of how faster economic growth seems perpetually out of reach.

Far from living up to expectations of a lift after Trump’s election, the growth rate in the first quarter turned out to be an anemic 1.4 percent. Some of the weakness stemmed from seasonal factors and calendar quirks that have repeatedly produced soft annual starts during the current recovery.

The indicators that Trump highlighted in recent messages on Twitter are indeed pointing in the right direction — strong job creation, a record high for the Dow Jones industrial average and low gasoline prices. But so far, the economy’s basic trajectory remains the same as it did under President Barack Obama.

The diminishing expectations are reflected in the dollar’s recent slump. That is not necessarily a bad thing — a weaker dollar makes exports more competitive in foreign markets. It is, however, a sign of the world’s take on the U.S. economy, as well as an indication of improving prospects abroad, especially in Europe.

Experts say that without a meaningful change in government policies — greater infrastructure investment, an overhaul of the corporate tax code, a new commitment to improve the skills of American workers — there is no reason to expect the domestic outlook to change.

And with deep party divisions in Washington — and the inability of Republicans so far to capitalize on control of Congress and the White House — the odds of passing a major infrastructure bill or sweeping tax legislation are growing longer by the day.

“I don’t see any reason we will veer from a 2 percent growth rate,” said Scott Anderson, chief economist at Bank of the West in San Francisco. “The safe bet is to expect more of the same. Unless we do things to boost productivity, this is the economy we are going to see.”

Growth of 2 percent is not horrible, especially given that the recovery is now the third longest on record and that the unemployment rate is at 4.3 percent, the lowest in 16 years.

Still, it is a far cry from the annual gains of 3 percent or more achieved a decade ago, or the 4 percent rate in the late 1990s. Nor is it strong enough to deliver big increases in household income, which has been stagnant for decades for all but the wealthiest slice of the population.

Anderson said much of the deceleration could be linked to forces beyond the control of politicians and policymakers: an aging population in the United States and a workforce that is growing much more slowly than in past decades.

“Washington seems tone-deaf to this reality,” he said. “Economists have been talking about these things for years, but getting the political will together to address them has been difficult with the gridlock in Washington.”

“We had an opportunity to do some real heavy lifting on the infrastructure issue when interest rates were very low,” Anderson added. That window has now almost certainly closed, with the Fed normalizing monetary policy and gradually raising interest rates.

With higher borrowing costs practically inevitable in the future, Anderson said, “the real tragedy is that the price tag for any future infrastructure spending will be a lot higher.”

Pomboy pointed out that changing consumer habits in the wake of the financial crisis and the recession — notably an increased wariness about spending and taking on debt — also explain what is looking more and more like a long-term downshift.

“The post-crisis consumer is fundamentally different from the consumer we knew and loved before the crisis,” she said. The household savings rate, which bottomed out at 2.2 percent amid the housing bubble in 2005, now stands at 5.5 percent.

In addition to being more cautious about spending in general and about borrowing against their homes in particular, Pomboy said, consumers are holding back on discretionary purchases because of the rising health insurance premiums and medical costs as well as onerous student debt payments.

Another warning sign: After rising steadily from 2011 to 2015, federal tax payments from individuals are down slightly this year compared with the previous 12 months, suggesting that personal income is faltering.

“Despite lip service about the ‘new normal,’ economists continue to forecast growth of 3 to 3.5 percent,” Pomboy said. “We’re eight years into the recovery — that’s not when things accelerate. It’s when they die.”

To be sure, most mainstream economists do not foresee an imminent recession.

Nariman Behravesh, chief economist at IHS Markit, goes so far as to say, “we’re chugging along here,” citing healthy income growth and hiring, as well as a strong housing market.

Nor is everyone prepared to give up on growth.

Macroeconomic Advisers, a St. Louis research firm whose crystal ball is highly regarded among forecasters, began the second quarter by calling for 3.6 percent growth but now estimates the rate will be more like 2.5 percent. But Ben Herzon, a senior economist there, said the rebound is delayed, not dead, especially as businesses restock warehouses and shelves after drawing on inventories in the first half of the year.

“Godot has to show up at same point,” he joked. “The models are showing that.”