The U.S. economy expanded an impressive 4.1% in the second quarter, the fastest pace in about four years. And President Donald Trump told the American people soon after the data was published that you ain’t seen nothin’ yet. With the first quarter numbers also revised upwards from 2% to 2.2%, there is a lot of momentum for third quarter growth, something that could help the GOP in November.
According to the Bureau of Economic Analysis (BEA), personal consumption, net exports, intellectual property, and government spending contributed to the April to June period’s expansion. There were some red flags in the report, though: business fixed investment was down from 8% in the first quarter, residential investment declined, and inventory investment dipped.
Overall, the national economy has accelerated at an annual rate of 2.8%. This is enough positive data for the Federal Reserve to continue down the path of normalizing interest rates – the central bank is expected to pull the trigger on two more rate hikes in 2018. For Fed Chair Jerome Powell, it’s all about the data, something he reaffirmed during his recent semi-annual testimony on Capitol Hill.
An hour after the report was made public, President Trump said on the South White House Lawn:
“We’re on track to hit the highest annual growth rate in over 13 years. And I will say this right now and I will say it strongly, as the deals come in one by one, we’re going to go a lot higher than these numbers, and these are great numbers.”
The Trump administration will not settle with 4.1%. The president thinks the economy can top 9%, while Treasury Secretary Steven Mnuchin is forecasting 3% growth for the next four to five years.
Is this sustainable?
Looking Ahead to Q3 2018
When the White House prognosticated that quarterly growth will surge higher than 4%, most of the so-called experts on television dismissed the generous projections. These are the same analysts who did not anticipate the dot-com bubble, the real estate collapse, or the Great Recession; they just thought everything was fine and dandy. It’s akin to the intelligence community, swamp creatures, and neoconservatives who said the wars in Afghanistan, Iraq, and Libya would be a cakewalk.
Mike Gallagher, managing director at financial consultancy Continuum Economics, told CNBC that it’ll be difficult to achieve even 3% in the long-term. The Guardian notes: “U.S. growth figures won’t get any better than they are now for Trump.” Ryan Sweet, director of real-time economics at Moody’s Analytics, avers that it will be hard to top 4% again.
Here is the truth: It is difficult to predict the economy; nobody can see into the future. You can ask questions, analyze the data, and suggest long-term scenarios – for instance, everyone knows the current welfare state and the national debt are unsustainable. But to say that economic growth will not go beyond 4% again is a fatuous conclusion – how many people predicted a recession by now?
Those suits you see on television may have hit the bullseye once or twice, but they are routinely wrong. We remember the monumental occasion they were correct, but we ignore the multiple times they were incorrect.
Many of these financial wizards on television refuse to mention Fed figures. If you examine the M2 money supply – a calculation of money supply that includes cash, checking deposits, savings, mutual funds, money market securities, and other time deposits – you notice that money supply growth slowed from 2016-2017 to 2017-2018. Also, if you further assess the Austrian school measure of the supply of U.S. dollars, which includes Treasury deposits at the Fed, printing tumbled to a multi-year low.
Does this mean Q3 growth will stall or intensify? It really depends on how much newly created money seeps into the market in the next quarter.
Despite claims that it is a great barometer of economic activity, the GDP is a meaningless and flawed statistic. Let’s say an entrepreneur opens a store and constructs a new brick-and-mortar establishment. The store required immense investment, from the materials to the manpower, but the business does not hire any employees, sell any products, or attract any customers. It is a zombie company, but it contributed to the country’s GDP.
Moreover, government spending has become an important aspect to GDP calculations – federal and state outlays accounted for a great portion of Q2 numbers. With governments spending trillions of dollars every year, adding to the GDP, you start to begin to realize why Republicans and Democrats are typically hesitant about imposing major spending cuts.
Is it any surprise that the definition of the GDP was created using the Keynesian model of how the economy functions?
Trumponomics is Booming
The left may detest the fact that Trumponomics is booming in America right now. Whether this economic spike is short-lived or will linger throughout Trump’s term, the MAGA crowd can smile with glee, especially as those who portray experts on television expected doom and gloom prior to the era of Trump, eh Paul Krugman?
The right may be pleased with Trumponomics – slashing taxes and maintaining a pro-business environment – but perhaps fiscal conservatism is being abandoned for electoral gains.
Libertarians, meanwhile, understand that this is part of the boom-bust cycle brought to you by the Federal Reserve System. Money supply creation, historically low interest rates, and enabling debt growth are all factors that allow politicians to either take credit for the booms or blame their predecessors or successors for the busts.
By the time former President George W. Bush finished his term in office, he endured the bust side of the cycle. Former President Barack Obama just got into office at the starting stages of the boom period, and it persisted throughout his tenure, no matter how anemic it was. Is President Trump escalating the boom or is he about to suffer the bust? Time, and the occupants inside the Eccles Building, will tell.
For now, we can just relish in the fact that economic growth is triggering the likes of Bill Maher.
What do you think of the Trump economy? Let us know in the comments section!