A Goldilocks Economy That Trump Wants Hotter

Disaggregate. That’s what to do when a bit of economic data is released and proves so pleasing to the administration that all the President’s men, persons, these days, hie to the television studios to claim it’s all due to the shrewd economic management of their boss. Which is what happened when the government’s advance estimate of GDP (two revisions to come) showed that the economy had grown at an annual rate of 3.2% in the first quarter. “An incredible number” enthused the President, who was not using the word in its literal meaning.

The report came as a surprise: the staff of the New York Fed and many other forecasters were predicting growth of a mere 1.4% only three days before the actual number was released. Larry Kudlow, the President’s chief economic adviser, and Kevin Hassett, chairman of the President’s Council of Economic Advisers, expressed their pleasure at the news. Hassett put the higher-than-expected growth down to “a serious response to long-run policies that have made the US a more attractive place for business.” They were undoubtedly relieved that it remains true that if winter comes, spring can’t be far behind, because the last quarter of 2018 was a glum one indeed, with investors scurrying to dump shares, China headed for recession, talk of an earnings recession around the corner, GDP growth decelerating, and a peevish President demanding that the Fed cut interest rates to stimulate growth.

So two cheers for the Q1 3.2% growth rate. But hold the third while we disaggregate. If we eliminate the rise in inventories – goods produced but not sold; a drop in imports that is unlikely to be repeated; and similar factors — the growth rate for sales to private (non-government) domestic buyers comes to only 1.3%. Consumer spending grew at less than half the fourth quarter 2018 rate of 2.5%. Business investment also lagged

Still, any headline number close to or above 3% suits Trump just fine. If it holds until the elections, now only 18 months away, he can plausibly claim that his unwinding of the miles of regulatory red tape left to him by Barack Obama has buoyed business confidence and unleashed the animal spirits of investors, contrary to his opponents’ prediction, the tax cuts he pushed through are providing more than a “sugar high” of temporarily elevated demand, his much-maligned tariff wars are paying dividends in better trading opportunities for American firms, as the soon-to-be-inked deal with China will demonstrate, workers, especially those at the lower end of the earnings scale, are sharing in the benefits: average hourly earnings rose last month by 3.2% over last year, the ninth straight month in which growth topped 3%, and despite higher wages, inflation, as measured by the Fed’s preferred inflation index, is tame, rising by only 1.5% in March over last year’s figure, remaining well below the Fed’s 2% target.

Trump also claims, less plausibly, that the pressure he put on the Fed forced it to call off its plans to raise interest rates. Not likely, but the Fed’s new-found “patience” is contributing to a buoyant stock market (share prices up 17% since the beginning of the year), The combination of rising share prices and low inflation makes for happy retirees: 82% say they are confident about their ability to live comfortably throughout their retirement. Trump is gambling that happy retirees are happy voters in swing-states such as Pennsylvania and Florida, with their large contingents of elderly voters.

Meanwhile, the jobs market continues to Make America Great Again, as the President would put it. The economy added 263,000 jobs in April, and the unemployment rate fell from 3.8% to 3.6%, the lowest rate in almost half a century.

Which leaves two very difficult questions, one important to Trump, the other to the nation. Are happy days of 3+% growth, jobs for all and low inflation likely to last until November 3, 2020? And what are the likely longer-term economic consequences of the reign of Donald J. Trump?

The answer to the first is more likely “yes” than “no”. Retail sales shot up in March and were 5% higher than last year despite bad weather. Factory orders also rose. Fiscal policy remains loose and stimulative and, especially if an infrastructure plan is agreed, is more likely to loosen than tighten. The Fed is likely to remain “patient”, and might even consider lowering rates if inflation remains tame. All of this bodes well for near-term growth. Fed chairman Jay Powell’s non-partisan appraisal has none of the usual on-the-one-hand-on-the-other-hand escape clause, “Our appraisal, and my outlook, is a positive one, a healthy one for the rest of this year.”

Longer-term prospects are even brighter. Administration spokespersons have been arguing that the Trump tax cuts have provided businesses with the incentive to invest in new technologies that enhance productivity. And that deregulation has removed one of the disincentives to do just that.

Late last week there was some indication that they might be right. Productivity increased by 3.6% in the first quarter, the largest jump since September 2014. And despite an increase in hourly compensation, up 2.6%, unit labor costs fell by 0.9%, as greater productivity more than offset higher wages. Hassett sums it up this way, “So many positives are basically the residual effect of going from being the highest-tax place on earth to being an attractive place…. That’s a fundamental shift in the economy and the economic outlook and it’s not one that reaches its complete fruition after one year.”

So Rosy Scenario has returned to the national stage, the President is taking credit for her latest performance and hoping she enjoys a long run.