Can economic growth through tax reform and deregulation withstand the headwind of higher interest rates, tariffs and perhaps a democratic congress? That is the question we are taking from the strong but somewhat disappointing Friday report on third quarter economic growth. The answer is not obvious.
The Commerce Department reported that the economy grew by a robust 3.5% in the third quarter, a slight slowdown of 4.2% in the second. Consumer spending was leading with a 4% increase, driven by a tight labor market and wage growth that had boosted economic confidence. The economy has grown by 3% in the last 12 months.
The US economy has not grown by 3% since 2005, and that is now possible this year. Barack Obama has recently taken credit for this faster growth as he fights for Democrats, but this boast is right up there with his promise that if you like your health plan, you can keep it.
It is clear that the republican policy mix of tax reform, deregulation and general risk-taking encouragement has saved an expansion that has fallen into recession in the last six quarters of the Obama administration. The adjacent diagram tells the story that Obama and his economists will not admit. Increased business and consumer confidence has been central to this recovery.
The disappointment in the third quarter is the slowdown in business investment. Non-residential fixed investment fell by 0.04% of GDP after three quarters of heavy investment. More than 2% of GDP growth came from inventories and 0.56% from government spending, especially defense. These are transitory measures that will not drive growth in the long term.
The Ministry of Commerce gnomes said they could not determine how much of this was related to hurricanes, and there could be significant revisions as they sort the data. White House chief economist Kevin Hassett said Friday he expects revisions.
But it's already clear that the interest-sensitive sectors of the economy are struggling. Housing investment declined 4% and investment in office buildings fell 7.9%. Car and truck sales declined significantly compared to the first quarter. This is not very bad news, because unlike the mid-2000s, the growth is not due to a real estate bubble. This would make it less vulnerable to a financial meltdown.
But the growth data should prompt the Federal Reserve to think hard about the December rate hike. Demand for dollars is strong, which will reduce inflationary pressures in the US. The increase in long-term bond yields means credit conditions have already tightened. The Fed governors should not feel that they need to raise interest rates just because Donald Trump urges them and not .
More worrying are the losses from the customs wars, which became apparent in the third quarter. Exports fell by 3.5% and goods exports by 7%. Exports rose in the second quarter, in part due to an increase in soybean sales to beat Donald Trump's tariff deadline, but now the lost market share is starting to materialize. Imports continued to rise and this could be related to American companies buying from foreign suppliers the next White House border tax adventure.
President Trump says tariffs are a free lunch, or at worst, the short-term price to open foreign markets. But this price is rising and it can not be short-term. The US has imposed $ 250 billion on Chinese goods, and Beijing has beaten US $ 1
The United States Chamber of Commerce draws up a list of the damage caused by these business taxes across the country. Among the "extremely high-damage" states are Wisconsin, whose $ 2.4 billion exports, Iowa's $ 1.4 billion, Florida's $ 2.2 billion, Georgia's $ 2.8 billion, and Ohio's 5.7 Billion dollars are threatened. These are all states with competitive races for governor, where the GOP could lose its influence on the statehouse.
The arbitrary political nature of customs duties means that they operate much like Barack Obama's regulatory economic war. They increase costs and create uncertainty that affects tens of thousands of business decisions – lost purchase, lost sales, or lack of investment. The longer Mr. Trump leaves his trade loops, the greater his danger of growth and re-election.
Even more so as Mr. Trump is soon confronted by a democratic house, if not by the Senate, with an economic challenge. A tax hike would be at the top of spokeswoman Nancy Pelosi's policy list, and she could use the need to raise the debt ceiling in 2019 to force Mr. Trump's hand. Mr Trump is right to claim the growth spurt of the economy, but risks are at stake. He should remove any obstacles to growth without the need of Congress or the Fed.