As economy hits high note, Trump takes bow

Economists warn growth is unsustainable in long term

Tax cuts and federal spending are adding fuel to the already strong economy, putting the United States on a pace for its best year of growth in well over a decade.

The Commerce Department reported Friday that gross domestic product, the broadest measure of goods and services produced in the economy, grew at a 4.1 percent rate in the second quarter of the year. Consumers led the way, shrugging off higher gasoline prices and sluggish wage growth to step up their spending on everything from cars to clothes to restaurant meals.

President Donald Trump hailed the data as evidence that his policies on trade, taxes and other issues were working. Robust growth is good news for Republicans, who are counting on the economy to help them in midterm elections this fall.

“Once again, we are the economic envy of the entire world,” Trump declared outside the South Portico of the White House, flanked by his top economic advisers.

Economists caution that the latest acceleration, while good news for American businesses and households in the short term, is unsustainable in the long term and could raise the risk that the recovery will flame out in the years ahead.

The quarter’s figures were pumped up by a range of one-time factors that are unlikely to recur. Most forecasters expect growth to cool in the second half of the year — even without factoring in the possibility of a trade war, which corporate executives in recent weeks have

cited as a source of uncertainty that could force them to pare hiring and investment plans.

But there is little question this spring was a high point in the rebound from the recession that struck a decade ago.

The unemployment rate, which topped out at 10 percent, has fallen to 4 percent. Job growth is on a record streak. American factories, an emphasis for Trump, are hiring at their fastest rate in two decades. And the second quarter’s performance — the best quarterly showing since 2014 — was equaled or exceeded in just four quarters during the eight years of the Obama administration.

Measures of underlying growth were robust, and economists say it is increasingly likely that full-year growth in gross domestic product could hit 3 percent in 2018 for the first time in the nearly decadelong recovery.

“The bottom line is that the economy is doing better,” said Diane Swonk, chief economist for the accounting firm Grant Thornton.

At Grote Co., a manufacturer of food-processing equipment in Columbus, Ohio, business is “record fantastic,” according to Bob Grote, the company’s chief executive.

“Everybody I talk to is literally having banner years the past few years,” he said. “I don’t see any end in sight right now.”

Grote said he was benefiting from several trends. Confident consumers are eating out more, leading to more demand for the pepperoni slicers, bread cutters and sandwich-assembly equipment that Grote makes. The tight labor market is making it harder for food businesses to hire workers, creating more demand for automated equipment. And the tax cuts passed last year have encouraged customers to invest in equipment — and have led Grote to do the same, moving projects planned for 2019 or 2020 up to the present day.

“We’ve spent more on capital equipment this year than we probably have in the last five combined,” Grote said. “We’re going to see the benefits of it a lot sooner.”

That’s exactly the kind of investment the tax law was meant to encourage. So far, however, there is scant evidence that companies broadly are reinvesting their tax savings. Business investment in equipment has grown more slowly in the first half of the year, and many companies are choosing to pay dividends and buy back shares instead.

“Business spending is not picking up the way proponents of the tax cut had hoped,” said Michael Gapen, chief U.S. economist for Barclays.

Instead, the tax cuts seem to be encouraging consumer spending, which rose 4 percent in the spring quarter, the biggest increase since 2014. Increased federal spending — the result of the two-year budget deal passed by Congress this year — is likewise giving the economy a lift, helping to nudge GDP growth out of the rut of 2 percent to 2.5 percent where it has spent much of the recovery.

Whether those policies are a good idea is another question. Many economists question the wisdom of passing what amounts to a deficit-funded stimulus package when unemployment is low and the economy is strong. Few outside the White House think a growth rate of 4 percent is sustainable in the long term, in part because the aging of the baby boom generation means a shrinking share of the American population is working.

“It’s economic conventional wisdom that in times like this you should prepare for the future and get your fiscal house in order, and we’re really doing the opposite,” said Michael A. Peterson, chairman of the Peter G. Peterson Foundation, which has long argued for reducing the federal deficit.

The more immediate risk may be the possibility of a trade war. Trump has placed tariffs on billions of dollars of imports from China, the European Union and other countries. Trading partners have responded by imposing retaliatory tariffs, and both sides have threatened more.

Tensions with Europe appeared to ease this week when Trump and Jean-Claude Juncker, the president of the European Commission, agreed to work toward a trade deal. But the durability of that truce is unclear, and relations with China remain fraught.

Trade friction has yet to dampen business leaders’ confidence, however, let alone caused them to change their behavior. In conference calls in recent weeks, executives said they were watching tariff announcements closely, and companies including General Electric, Whirlpool and United Technologies have said tariffs are raising costs or cutting into profits. Few, however, said they were slowing hiring or canceling projects.

“You’re hearing some notes of caution, but nothing specific regarding pullbacks,” said Bill Warlick, an analyst for Fitch, the ratings agency. Big companies, he said, make big investment decisions years in advance and will be slow to change course.