Two Big Reasons Why Today's GDP Growth Number Might Not Be Sustainable

The Trump administration is touting the most recent GDP growth number, but not everyone is convinced it will last.
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President Donald Trump gives remarks on the economy at the South Lawn of the White House on July 27th, 2018.

President Donald Trump gives remarks on the economy at the South Lawn of the White House on July 27th, 2018.

The Department of Commerce announced on Friday that it estimates the country's gross domestic product (GDP) grew by 4.1 percent in the second quarter of 2018, the highest rate recorded since 2014. The impressive growth was expected—the president and other administration officials had told observers to expect a big number in recent days. Sure enough, President Donald Trump quickly took to Twitter to boast about the "GREAT GDP numbers just released."

Republicans and the president were quick to link the GDP growth to their policies. In response to the report, Senator Orrin Hatch (R-Utah) tweeted: "Another #taxreform promise kept: strong economic growth." Speaking to reporters shortly after the report's release, Trump praised the "amazing" numbers, boasted about a recent decline in the trade deficit, and proclaimed that the second-quarter GDP growth numbers were "very, very sustainable."

To that latter prediction, many economists would disagree. While most economists do believe that the tax reform legislation and the large, bipartisan government spending deal struck last year are two of the drivers of today's strong growth numbers, many are warning that the second-quarter GDP number comes with some big caveats:

The Trade War May Have Been a Driver of Second-Quarter Growth, but Not in the Way You Think

A number of analysts have pointed out that the administration's trade threats earlier this year caused countries to stockpile American products in anticipation of higher tariffs, producing an export surge in the second quarter (and boosting GDP growth). Exports rose 9.3 percent in the second quarter, driven by significantly increased foreign demand for soybeans.

This surge will not be repeated. In a research note published earlier in the week, analysts at Morgan Stanley estimated that trade and inventories accounted for almost half of projected GDP growth. "We find evidence that the hefty contributions from these two categories is likely a reflection of stockpiling ahead of the implementation of trade tariffs, and so they are likely to subtract from growth in the following quarters," the analysts wrote.

If the trade war continues and exports fall dramatically, economists expect the administration's trade strategy will ultimately result in slower GDP growth.

Economists Don't Think the Growth Effects of Tax Reform and Government Spending Will Last Forever

Most independent evaluations of the December tax cut legislation did project stronger economic growth as a result of the legislation. However, they also projected that those growth effects would be temporary, lasting only a few years. Economists similarly think the growth effects of the large government spending deal passed in December will begin to fade out later this year.

Meanwhile, economists remain concerned about two other big economic issues:

The Federal Deficit Is Growing, Faster Than Expected

As the New York Times' Jim Tankersley wrote earlier this week, "[t]he amount of corporate taxes collected by the federal government has plunged to historically low levels in the first six months of the year." Despite a roaring economy and record levels of corporate profits, corporate tax payments this year have also been lower than the levels projected by budget analysts in advance of the passage of tax reform legislation.

The lower corporate tax receipts have also contributed to a meaningful increase in the federal deficit. The Office of Management and Budget, headed by Trump appointee Mick Mulvaney, currently projects that the deficit will hit $1 trillion next year. Administration officials, who argued that the tax cuts would pay for themselves through higher growth, say they expect corporate receipts to eventually increase again.

Wage Growth Is Still Slow

Economists have been struggling for months to understand why wage growth remains sluggish in the face of low unemployment numbers and the strong economy. Earlier this month, the Bureau of Labor Statistics reported that, after adjusting for inflation (which has been high), real average hourly earnings were "unchanged" between June of 2017 and June of 2018. For production and nonsupervisory employees, real wages actually declined by 0.2 percent during that same time period.

Economists across the ideological spectrum agree that more robust GDP growth is a very good thing. Most independent economists and experts, however, remain skeptical that the current administration's economic strategy of tax cuts, higher deficits, and trade wars will bring the kind of economic stability that many American families need.

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