3% growth, if we can keep it
3% growth, if we can keep it
Can the economic growth of tax reform and deregulation deal with the winds against higher interest rates, tariffs and perhaps a Democratic Congress? That is the question we removed from Friday's strong but somewhat disappointing report on economic growth in the third quarter. The answer is not obvious.
The Commerce Department reported that the economy grew at a robust 3.5% in the third quarter, a slight deceleration of 4.2% in the second quarter. Consumer spending opened the way with a 4% increase rooted in an adjusted labor market and wage gains that have strengthened economic confidence. The economy has grown 3% in the last 12 months.
The US economy UU It has not grown 3% in a calendar year since 2005, and now it can be achieved this year. Barack Obama has been claiming credit for this faster growth while he campaigns for the Democrats, but that bragging lives up to his promise that if he likes his health plan, he can keep it.
It is clear that the combination of the Republican policy of fiscal reform, deregulation and general stimulus to take risks rescued an expansion that was rapidly fading and almost fell into recession in the last six quarters of the Obama administration. The close chart tells the story that Obama and his economists do not admit. The increase in business and consumer confidence has been fundamental to this upturn.
The disappointment of the third quarter is the slowdown in business investment. Fixed non-residential investment subtracted 0.04% of GDP after three quarters of heavy capital spending. More than 2% of GDP growth came from an accumulation of inventories and 0.56% of government spending, especially defense. Those are transitory measures that do not drive long-term growth.
The gnomes of the Department of Commerce said they could not determine how much of this is related to the hurricane, and that there could be substantial revisions as they sort the data. White House chief economist Kevin Hassett said Friday he expects revisions.
But it is already clear that the areas of the economy sensitive to interest rates are struggling. Investment in housing fell by 4% and investment in commercial buildings fell by 7.9%. Sales of cars and trucks have decreased significantly since the first quarter. This is not totally bad news because it means that, unlike in the mid-2000s, growth is not based on a real estate bubble. This would make him less vulnerable to a financial crisis.
But the growth data should make the Federal Reserve think carefully about the interest rate increase it anticipated for December. The demand for dollars is strong, which will reduce the inflationary pressure in the US. UU The increase in long-term bond yields means that credit conditions have already narrowed. Fed governors should not feel they have to raise rates simply because Donald Trump presses them. do not to do it
More worrying is the damage from the tariff wars that was clearly shown in the third quarter. Exports fell by 3.5% and exports of goods by 7%. Exports increased in the second quarter partly due to an increase in soy sales to exceed the Donald Trump tariff, but now the lost market share is being lost. The next tax robbery on the White House border.
President Trump says the rates are a free lunch or, in the worst case, the short-term price to open foreign markets. But that price is rising and may not be in the short term. The United States has imposed tariffs of $ 250 billion on Chinese products, and Beijing has retaliated with $ 110 billion in exports from the United States. Canada and Mexico have added $ 20 billion more in response to Trump's steel and aluminum tariffs that have not yet been canceled despite the new North American trade agreement. The negotiations with China are not going anywhere.
The US Chamber of Commerce UU It compiles a list of the damages that these taxes to the commerce are doing in the whole country. The states that suffer "extremely significant damages" include Wisconsin, with $ 2.4 billion of their threatened exports, Iowa $ 1.4 billion, Florida $ 2.2 billion, Georgia $ 2.8 billion and Ohio $ 5.7 billion. Those are all states with competitive races for governor where the Republican Party could lose its control over the state house.
The arbitrary political nature of tariffs means that they operate in much the same way as the companies' regulatory war against Barack Obama did. They increase costs and create uncertainty that affects tens of thousands of business decisions: in lost purchases, lost sales or unrealized investment. The later Mr. Trump takes to resolve his commercial fights, the greater the threat to growth and his re-election.
All the more so because Mr. Trump could soon face an economic challenge from a Democratic House, if not from the Senate. A tax increase would be near the top of President Nancy Pelosi's policy list, and could use the need to raise the federal debt limit in 2019 to force Mr. Trump's hand. Mr. Trump, rightly so, can take credit for the growth of the economy so far, but there are risks ahead. You should eliminate any growth barrier that you can without the need for Congress or the Federal Reserve.
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