Friday, July 27, 2018

GDP Boomed In the Second Quarter, But Will Trade Fears Kill Growth?

The initial estimates of second quarter GDP growth are in and the economy is booming. The economy grew at 4.1 percent despite fears of a trade war fueled by President Trump’s tariff policy. The April through June growth was powered by consumer spending, exports and business investment.

The 4.1 percent growth rate was the best in four years. The last time that the GDP - the total value of goods and services produced across the national economy – grew more rapidly was in the third quarter of 2014 when the US posted 4.9 percent GDP growth. The second quarter numbers were significantly better than the first quarter growth rate of 2.2 percent.

“We're on track to hit the highest annual growth rate in over 13 years,” President Donald Trump said shortly after the Commerce Department announcement. “And I will say this right now and I will say it strongly, as the deals come in one by one, we're going to go a lot higher than these numbers, and these are great numbers.”

Trump also claimed that that the economy under his administration grew at a rate ten times faster than under Presidents Obama or Bush. The Wall Street Journal notes that this claim is false. Those presidents each had four quarters of economic growth that was greater than 4.1 percent. President Obama’s best showing was the second quarter of 2014 when the economy posted 5.1 percent growth, the best numbers posted since the 2008 recession.

Consumer spending accounted for more than two-thirds of the growth. This increase “was more powerful than anticipated and speaks to the impact of an increasingly tight labor market and strong job growth on consumer income and households’ confidence,” said Brian Coulton, chief economist at Fitch Ratings. Coulton added that the “numbers really bring the possibility of 3% growth for 2018 as a whole into the frame.”

The big question about continued GDP growth deals with Trump’s trade policy. Exports rose strongly in the second quarter and contributed 1.06 percent to the overall growth rate. The boom in exports was largely due to tariff-targeted nations such as China ordering US products like soybeans before export taxes kick in. Regardless of the outcome of the trade discussions, US export levels are likely to return to historically lower levels.

If the trade war continues to heat up to the point where American businesses dependent upon international trade lay off workers and cut wages, consumer spending could also take a hit in future quarters. The University of Michigan’s consumer sentiment index has already reported that consumer confidence is down slightly for July based on “consumers who had negative concerns about the [trade] tariffs [and] voiced a much more pessimistic economic outlook.”

For now, however, President Trump and the Republicans can bask in the strong numbers in the run-up to the November midterm elections. They can justifiably point to tax reform and deregulation as factors in the current economic boom. The problem will be in convincing voters that President Trump’s trade policies won’t lead to a bust.

Originally published on The Resurgent

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