Economic growth in the first quarter was disappointing, but still not too shabby. And over the last four quarters, growth has nearly hit the level President Trump said he would achieve while campaigning.
GDP growth in the first quarter was a middling 2.3%, down from 2.9% in the fourth quarter. But first quarter GDP growth has been confoundingly low in several years recently, suggesting a measurement problem with the data that might be related to winter weather, or something else. Growth in subsequent quarters has sometimes come in stronger than expected, as if some growth is pushed out of the first quarter into other quarters.
During the last 12 months, the picture is clearer—and more encouraging. President Trump has promised to boost annual GDP growth to 3% or more, and he’s nearly there. The economy has grown at a 2.9% annualized rate during the last four quarters, including the weak first-quarter number that just came out. If there’s a snapback in growth this spring or summer, annualized GDP growth will exceed 3%.
Trump’s predecessor, President Obama, oversaw an economy that staggered out of a deep recession and never quite got into gear. During Obama’s second term, annual GDP growth averaged just 2.3%. The strongest years under Obama were 2013 and 2014, when growth hit 2.7%. But in Obama’s final year, growth fell to just 1.8%, fueling Trump’s rampant criticism of Obamanomics.
On the Yahoo Finance Trumponomics Report Card, which has been measuring the progress of the Trump economy since last May, Trump earns a B. Strong points: Gains in overall employment and manufacturing employment. Weakness: Average hourly earnings.
Virtually every time we report on the Trump economy, a raging argument breaks out between Trump loyalists who think Trump has singlehandedly stimulated growth, and Obama loyalists who say the former president set the stage for whatever success Trump enjoys. Both groups overstate their case. The business cycle develops over a long arc, with federal policy set by the White House often a minor factor, at most. The Federal Reserve’s monetary policy typically affects the economy more than any president’s actions. And policy actions that do matter often play out over years, with consequences that sometimes materialize after the president who put them into motion are gone from office.
Bigger impact of tax cuts
The Republican tax cuts, which Trump signed at the end of 2017, could turn out to be one policy move that has unusually quick and direct effects on the economy. Many economists and Wall Street analysts expect those tax cuts to sharply boost corporate profits, leaving more money to invest in workers and new facilities. The new tax law slashed the corporate tax rate from 35% to 21%, which ought to push more money into the economy right away.
If that’s helping the economy, however, it’s not yet showing up in the GDP data or other economic metrics. The rate of growth in business investment actually slowed during the first quarter, when some economists thought it would surge on account of the tax cuts. “The slowdown in GDP growth … was something of a disappointment,” research firm Capital Economics explained to clients, “since the tax cuts should have provided an immediate boost.”
Consumer spending has weakened, too, with growth slowing from 4.4% in the fourth quarter to 1.1% in the latest quarter. Critics of the Trump tax cuts contend that they favor businesses and the wealthy too heavily, with little relief flowing to working- or middle-class families. We’re also in the midst of a surge in stock buybacks and dividend hikes, which return money to shareholders but don’t necessarily aid the real economy.
It’s also possible companies are just being circumspect about how to spend their tax-cut windfall, with spending likely to jump soon. “Growth is set to rev up soon given the deficit-financed tax cuts now coursing through the economy,” Moody’s Analytics predicts.
Moody’s Analytics forecasts GDP growth will hit 3% even in 2018, which would let Trump claim credit for reaching his target for a full calendar year, not just a 12-month, quarter-to-quarter period. But Moody’s and other forecasters say growth could fall back after that, as the Federal Reserve raises interest rates and additional government debt, issued to finance the tax cuts, begins to crowd out private investment. A recession could even strike by 2020 or 2021. Trump should claim credit for good times while he can.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman