Data from another source indicate that the last years with annual growth of 3% or better were 2004-2005 under Bush 43 and the last years with annual growth of 4%+ were in the Clinton era. Thebalance.com, accessed 11/15/18.
Our current president aspires to dramatically boost the GDP growth rate. Larry Kudlow (in a forward to Trumponomics, a book by Stephen Moore and Art Laffer published on October 30): Paul Bedard, Washington Examiner, 10/22/18.
National Economic Council Director Larry Kudlow, one of President Trump’s top policy advisers and an architect of the 2017 tax cut, said that Trump stays awake because he is “obsessed” with rebuilding the U.S. economy and reaching 5 percent growth.
If the 4th quarter forecast is achieved, the growth rate for 2018 will exceed 3% (also the average for the last 12 months). That’s not a truly eye-popping result, but it would represent a solid improvement since Trump took over. 3% growth, if we can keep it, Wall Street Journal, 10/26/18.
It’s clear that the Republican policy mix of tax reform, deregulation and general encouragement for risk-taking rescued an expansion that was fading fast and almost fell into recession in the last six quarters of the Obama Administration.
The nearby chart tells the story that Mr. Obama and his economists won’t admit. Soaring business and consumer confidence have been central to this rebound.
Economic results are affected by many variables, however, and several issues exist that could frustrate the president’s intentions. Discussion follows.
A. Good start – After the 2nd quarter growth rate came in at 4.1% (later adjusted to 4.2%), the president expressed great confidence that his economic policies – cut business and individual taxes, roll back regulatory red tape, and renegotiate trade agreements to favor US interests – were working as intended. Trump says strong economic growth proves “historic” turnaround, Dave Boyer, Washington Times, 7/27/18.
President Trump Friday hailed a new report on the strong growth of the U.S. economy, calling it proof that he has forged a “turnaround of historic proportions.” “We’re on track to hit the highest average annual growth rate in over 13 years,” Mr. Trump said at the White House. “We’ve turned it all around.”
Individual consumption rose at an annual rate of 3.8% in the second quarter, while nonresidential fixed (basically business) investment rose at a rate of 8.7%. Bureau of Economic Analysis (Commerce Department) report on 3rd quarter GDP, table 1, 10/26/18 (download PDF of underlying report). The nonresidential investment pickup, in particular, seemed to suggest that regulatory easing and business tax cuts had triggered a resurgence of business confidence.
The US trade deficit dipped by $52 billion in the 2nd quarter, which the president called a “tremendous drop.” “As the trade deals come in one by one,” he said, “we’re going to go a lot higher than these numbers.”
SAFE has been a big fan of the regulatory rollback, and we also endorsed the Republican tax cuts despite the immediate loss of tax revenue (and deficit increases) that were expected. Much of the revenue loss could be recouped over time via faster economic growth, we figured, making the tax cut seem like a reasonable bet. Assessing the Republican Tax Plan, 11/17/17.
Now the tax cut was starting to pay off, apparently, although critics sniffed that this would be a “sugar high” (short lived) economic uptick. Hmm, could it be that their comments were politically motivated? With the mid-term elections coming up, the last thing Democrats wanted to do was give the president credit for a booming economy. Trump says strong economic growth proves “historic” turnaround, op. cit.
The Democratic National Committee downplayed the positive report, saying in a statement, “Trump will try to boast about the economy, but the reality is that economic growth is not expected to continue at the same rate and workers have not benefited. Workers’ wages have actually decreased over the past year.”
B. Dimming prospects – The GDP growth rate of 3.5% (preliminary estimate) for the 3rd quarter represented something of a comedown after the stellar results in the 2nd quarter, but the president put a positive spin on things. Trump boasts best first-term economy in 3 decades, Stephen Dinan, Washington Times, 10/26/18.
President Trump will lead the GOP into the elections amid the best first-term economy in three decades. *** The last time a president had such a hot economy heading into the congressional elections in his first term was President Carter in 1978, who was sitting on a 4.1 percent growth rate.
Third quarter growth was driven primarily by consumer and government spending, however, while business spending was cooling off. US economy flashes signs it’s downhill from here, Jon Hilsenrath & Harriet Torry, Wall Street Journal, 10/29/18.
Business investment grew at an 11.5% rate in the first quarter [and an 8.7% rate in the second quarter], with gains across many categories, including machines, intellectual property and big structures. But it has faded since, registering just 0.8% growth in the third quarter. That includes a drop in investment in structures such as oil-and-gas rigs, which had been a big driver of growth.
Business investment can support productivity gains, which are essential to longer-term economic growth, so slowing business investment is not a good sign. No wonder many economists are predicting slower GDP growth in coming quarters. Ibid.
Economists surveyed by The Wall Street Journal estimate the growth rate will slow to 2.5% by the first quarter of next year and 2.3% by the third quarter of 2019. The Fed is expecting growth to slow further to a 1.8% rate by 2021.
As for the balance of payments improvement the president had crowed about in July, it was wiped out and then some in the third quarter. Bureau of Economic Analysis report on 3rd quarter GDP, op. cit., table 3.
Mainstream economists aren’t predicting a recession or other economic crisis in the immediate future, just a reversion to the previous mean for economic growth, but some analysts foresee big trouble ahead. Consider, for example:
• David Stockman: Epic downturn is here, brace for 40% market plunge, Stephanie Landsman, cnbc.com, 11/4/18.
David Stockman was President Reagan’s first budget director, who led an effort to effect deep spending cuts to keep the deficit from soaring as a result of the Reagan tax cuts. The failure of this effort was reported in The Triumph of Politics, 1986.
In this CNBC interview, Mr. Stockman predicts that “we’re within a year or two” of a major recession. Potential investors should sell now, because the president is “playing with fire at the very top of an aging expansion by pressuring the Federal Reserve not to raise interest rates that are at historical lows and waging a trade war that is “not remotely rational.”
• The last Republican president, Stansberry Research (Brett Aitken), Nov. 2018 (podcast, 20+ minutes).
This is basically a sales pitch by Stansberry Research, which offers contrarian financial advice. The speaker associates the presidencies of Herbert Hoover and Donald Trump, both businessmen who reached the White House without prior experience in elected positions, and predicts that Trump (like Hoover) will turn out to be a one-term president.
Trump’s downfall will supposedly come about despite a booming economy in 2020, reflecting the electoral dominance of millennials. These younger Americans have been conditioned (by our educational system and the mainstream media) to view government redistribution (not a robust economy) as the source of economic gains. Capitalism is outmoded, in their view, so Socialism (in one form or another) will be the wave of the future – until the bubble bursts. No way to stop this, sorry, but Stansberry is offering some insightful writeups for those who wish to prepare for the coming debacle and come out on top.
•11 signs that the US economy is starting to slow down dramatically, Michael Snyder, freedomoutpost.com, 11/14/18.
Mr. Snyder is best known for his work as the publisher of The Economic Collapse Blog; he has also written a 2013 book called The Beginning of the End.
Among his “11 signs” of trouble are recent oil price increases, soaring inventory of unsold homes, decline of retail malls, a study indicating that “62 percent of all US jobs do not currently pay enough to support a middle class lifestyle,” and a claim that “58 percent of Americans have less than $1,000 in savings.”
•Billionaire Ray Dalio, “Capitalism is not working for most people,” Kheng Guan Toh, newsmax.com, 11/12/18.
Capitalism has worked just fine for Ray Dalio, the founder of Bridgewater Associates (world’s biggest hedge fund), but he worries about a system that leaves many Americans living paycheck to paycheck – and facing a dismal future as the rise of “artificial intelligence” deprives them of viable employment.
Presumably the solution is government action of some sort, perhaps in partnership with the private sector. If he had the power, said Mr. Dalio in a recent speech, he would declare the wealth gap and opportunity gap a “national emergency.” He’s also on record as questioning whether the Federal Reserve is doing the right thing by continuing its current pattern of interest rate increases.
C. Assessment – SAFE never bought into the notion that this country should accept a reduced economic growth rate as the “new normal.” An economic reality check, Part 1, Economic Growth, 8/12/13.
The difference between a 3.5% growth rate (1929-2001) and a 1.4% growth rate (average for first two quarters of 2013) may seem minor, but would have a big impact over time. Here is an illustrative example, showing the 10-year effect of three assumed growth rates.
The president deserves credit, in our view, for proposing and seeking to meet a higher standard. And if his efforts succeed, they should pay off for everyone.
Perhaps streamlining regulations and cutting taxes will prove less effective than Trump and his supporters expect, but we’re all in favor of giving these ideas a try. As for the only obvious alternative, government action has far more downside.
Put the government in charge of ensuring that a suitable percentage of the population can enjoy a “middle class lifestyle,” for example, and the likely result wouldn’t be pretty. In the name of ensuring equality of outcomes, almost everyone (except the government elite) would wind up poorer.
Why? Experience has shown that centrally managed economies under-perform market economies, and having the government provide “free stuff” won’t change this. Moreover, acceptance of free stuff entails giving up the freedom to choose how to use one’s resources. Socialism’s irony law, Paul Jacob, townhall.com, 9/30/18.
What socialists always deny is this: the cost of “free stuff” is actual freedom. One must give up achievable freedom to get “everything” for free. And then it turns out, when everything not forbidden is made compulsory, one finds out that everything is more expensive, more scarce, more . . . non-existent, even.
The president and his economic advisers aren’t the only ones who have advocated a concerted effort to boost US economic growth. Notably, economist & financial consultant David Smick – who has advised political leaders on both sides of the aisle but has no history with Trump - advocated a pro-growth strategy that sounded remarkably “Trumpian” (with a few exceptions) in a book entitled The Great Equalizer that was published in January 2017.
[This] book sounds like a bit like a takeoff on “Make America Great Again.” Wanted: a more entrepreneurial economy – better rewards for the working class that drive “Main Street Capitalism” – sense that everyone is working for a common goal –transformational leadership – action to cut regulations, reform taxes and rebuild crumbling infrastructure - faster economic growth (aka the “great equalizer,” which averts endless bickering about how the economic pie is divided) – trade policies that don’t put the US at a disadvantage versus other countries – can do attitude versus bunker mentality. [However, Smick places greater emphasis on addressing the fiscal problem than Trump does, and he seems more favorably disposed towards immigrants.]
The Great Equalizer is well worth reading. We would certainly recommend it over Trumponomics, which doesn’t exactly seem to be “flying off the shelves.” The Art Laffer/Stephen Moore tome had only five reviews posted on Amazon when we checked on 11/18, two of which were negative.
Caveat: Although Smick does a great job of raising issues (see the following examples), he is less successful in providing solutions.
•How meaningful are the GDP data that government economists churn out every quarter, e.g., how can a basket of goods and services in the 21at century be quantitatively compared to a basket of goods and services that was available, say, 50 years ago when personal computers and cell phones didn’t exist, etc.?
•With more and more jobs being mechanized, including “knowledge work” as well as “manual labor,” what will the jobs of the future look like and how will people prepare for them? Is it possible that a large percentage of the growing population (including a continuing influx of immigrants) will wind up without meaningful functions to perform, leading to boredom and social instability?
•Smick sees entrepreneurial start-ups, not large organizations, as the true engine of growth. He doesn’t attempt to speculate, however, as to what products or services the businesses of the future will deliver – only that their offerings will be new and different.
•How can entrepreneurs be inspired to work their magic? The government’s job is to create a conducive environment, convince all concerned that they will be allowed to succeed (and profit appropriately), and then get the heck out of the way.
In sum, rebooting the economic system isn’t a simple task – and there is no assured strategy for success. We believe many of the president’s instincts are sound, and his emphasis on supporting the private sector for a change (versus giving more and more power to government bureaucrats) is refreshing.
But the president’s economic plan is sputtering at this point, and adjustments may be needed if it is to work. Several issues and some possible solutions are discussed in the next section.
D. Issues for the path forward
#FISCAL PROBLEM – SAFE stands by its support for the Republican tax cut that was enacted in December 2017, notwithstanding the initial increases in deficits and debt that will result. However, we do not agree with the spending blowout and restoration of special tax breaks that was enacted in February. Midterm issues: Taxes, Section A, 9/3/18.
Every effort should be made to identify and eliminate wasteful spending. Midterm issues: Deficits and debt, 9/24/18. We applaud the president’s recent guidance to his cabinet to cut spending, and would hope these thoughts will also be communicated to Congress (which must approve any spending cuts that are made). Stay tuned for further discussion.
#TRADE POLICY – We agree that a tougher stance versus China is needed, particularly when it comes to pressuring that country to refrain from the theft of intellectual property. We don’t agree that trade deficits are automatically bad, however, nor that it’s smart to simultaneously start “trade wars” with most of the nations around the globe.
Withdrawal from the Trans-Pacific Partnership (TPP) was a slapdash decision, which isn’t likely to stand the US in good stead when it comes to a showdown with China. Think twice about “America first” trade policy, 5/1/17.
Perhaps our concerns about the president’s trade policies boil down to style versus substance. Thus, the North American Free Trade Agreement was renegotiated instead of being terminated as threatened. Whether or not the new agreement (now called the US/ Mexico/ Canada agreement or USMCA) represents an improvement over the original NAFTA from a US standpoint, the consensus seems to be that it won’t do any major damage.
Nevertheless, two reservations about the administration's trade policies should be noted: (1) Trade actions taken to date have not reduced the US trade deficit. To the contrary, as was noted above, said deficit hit a new record in the third quarter; (2) Uncertainties about US trade policies are believed to have detracted from business confidence and willingness to invest. Trump’s trade war may be colliding with his economic growth goals, Colin Wilhelm, Washington Examiner, 10/31/18.
“I think the tariffs might’ve had some effect in that regard,” said Stephen Moore, a campaign adviser to Trump who also influenced last year’s tax code overhaul. “I think there’s no question that the tariffs have hurt the economy.”
#INFLATION – If the government provides excessive fiscal and monetary stimulus to the economy, there is a real risk that the economy will overheat and trigger a major inflationary spike. US experience during the 1970s demonstrates that this is not simply an academic concern, and the Federal Reserve under Paul Volcker had to raise interest rates very sharply – triggering a major recession – to get the situation under control.
Given this concern, we (like David Stockman) aren’t inclined to endorse the president’s complaints about Federal Reserve plans to gradually raise interest rates to more “normal” levels. There are solid arguments on both sides of the issue, however, and the Wall Street Journal editorial board now seems to be raising questions about the scheduled interest rate increase in December. Even though US economic growth is relatively strong, they argue, global economic growth is slowing down and another US interest rate hike at this point might have a disruptive effect. America is not an island, Wall Street Journal, 11/15/18.
#POLITICAL CONSIDERATIONS – One might think there would be agreement on both sides of the political aisle that a robust US economy is desirable, but many of the questions raised about the president’s economic plan seem to be based on political considerations, e.g., a desire not to give the president credit for any positive accomplishments, versus true differences of opinion on policy.
A supporting example was previously cited, namely a statement attributed to the Democratic National Committee after the stellar 2nd quarter results were announced. Here are two further examples published in October, both attempting to place all blame for deficits and debt on the Republican tax cuts:
•Don’t buy Trump’s boasts of historic growth, former Sen. Ted Kaufman, News Journal 10/28/18.
The president “consistently congratulates himself about dozens of ‘historic’ accomplishments and he is always wrong” – claim of responsibility for “an economic turnaround of historic proportions” is the worse yet – the real economic turnaround started in 2009 under President Obama, and the economy was in good shape when Trump inherited it – the Republican tax cut probably contributed to the recent acceleration of the growth rate, but said cut “has had a major negative effect on the financial stability of the country” – prime beneficiaries of the tax cuts are wealthy individuals, banks and corporations – Congressional Budget Office projects debt will keep growing faster than the economy indefinitely.
•When did Republicans stop caring about the deficit?, USA Today editorial published in the News Journal, 10/27/18.
The current deficit ($779B for FY 2018, in the range of $!T for FY 2019) is primarily a function of the GOP tax cut. And although trillion dollar deficits are “nothing new,” they are typically a function of economic downturns. The last time that unemployment was under 4%, in the year 2000, the government was running a $236B surplus. Republicans had plenty to say about four trillion dollar deficits during the Obama administration, but now not so much. As with “free trade, limited government, the rule of law, and presidents who set a proper moral example,” it seems their principles only matter “when there is some political advantage to be had.”
These critiques aren’t completely wrong, but - like the president’s rhetoric about economic results – they are considerably overstated. And the upshot is to undermine confidence in the president’s economic plan, effectively encouraging business leaders and investors to defer their investment plans on grounds that Democrats will reverse the current policies at the earliest opportunity. Sad!
#David Stockman never got things right. Maybe we should accept the “new normal” of the previous administration, i.e., 0-2%. – SAFE director
#The irresistible forces leading to political/social/ideological control will overpower all rational thinking. Even if “robotization” was to grow much more, it would be used to achieve the above! The likely end-result: Major social upheaval ... never mind economic growth. – SAFE member (DE).
Hmm, sounds like the Stansberry Research scenario.