3% Growth, If We Can Keep It Trump tariffs, the Fed and a Pelosi Congress pose risks to growth.
https://www.wsj.com/articles/3-growth-if-we-can-keep-it-1540595205
Can economic growth from tax reform and deregulation stand up to the headwinds from higher interest rates, tariffs and perhaps a Democratic Congress? That’s the question we take away from Friday’s strong but somewhat disappointing report on economic growth in the third quarter. The answer isn’t obvious.
The Commerce Department reported that the economy grew at a robust 3.5% in the third quarter, a mild slowdown from 4.2% in the second. Consumer spending led the way with a 4% increase rooted in a tight job market and wage gains that have bolstered economic confidence. The economy has now grown by 3% over the last 12 months.
The U.S. economy hasn’t grown at 3% in a calendar year since 2005, and that is now achievable this year. Barack Obama has recently been claiming credit for this faster growth as he campaigns for Democrats, but that boast is right up there with his promise that if you like your health plan you can keep it.
It’s clear that the Republican policy mix of tax reform, deregulation and general encouragement for risk-taking rescued an expansion that was fading fast and almost fell into recession in the last six quarters of the Obama Administration. The nearby chart tells the story that Mr. Obama and his economists won’t admit. Soaring business and consumer confidence have been central to this rebound.
The third-quarter disappointment is the slowdown in business investment. Nonresidential fixed investment subtracted 0.04% from GDP after three quarters of strong capital spending. More than 2% of GDP growth came from a buildup of inventories and 0.56% from government spending, notably defense. Those are transitory measures that don’t drive growth for the long haul.
The Commerce Department gnomes said they couldn’t determine how much of this is hurricane-related, and there could be substantial revisions as they sort through the data. White House chief economist Kevin Hassett said Friday he expects there will be revisions.
But it’s already clear that areas of the economy sensitive to interest rates are struggling. Housing investment fell 4%, and investment in commercial buildings fell 7.9%. Car and truck sales have declined significantly from the first quarter. This isn’t entirely bad news because it means that, unlike in the mid-2000s, growth isn’t built on a housing bubble. This would make it less vulnerable to a financial bust.
But the growth data should cause the Federal Reserve to think hard about the interest-rate increase it has anticipated for December. Demand for dollars is strong, which will reduce inflationary pressure in the U.S. The rise in long-term bond yields means that credit conditions have already tightened. The Fed Governors shouldn’t feel they have to raise rates simply because Donald Trump lobbies them not to do so.
More worrying is the damage from the tariff wars that clearly showed in the third quarter. Exports fell 3.5% and goods exports 7%. Exports had climbed in the second quarter in part on a surge of soybean sales to beat Donald Trump’s tariff deadline, but now the lost market share is setting in. Imports continued to rise and that may be related to U.S. firms buying from foreign suppliers to beat the next White House border-tax binge.
President Trump says tariffs are a free lunch, or at worst the short-term price to open foreign markets. But that price is rising and it may not be short-term. The U.S. has imposed $250 billion in tariffs on Chinese goods, and Beijing has retaliated with $110 billion on U.S. exports. Canada and Mexico have added $20 billion more in response to Mr. Trump’s steel and aluminum tariffs that he still hasn’t lifted despite the new North American trade deal. Negotiations with China are going nowhere.
The U.S. Chamber of Commerce compiles a list of the harm these trade taxes are doing across the country. States suffering “extremely significant damage” include Wisconsin, with $2.4 billion of its exports threatened, 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 GOP could lose its hold on the statehouse.
The arbitrary political nature of tariffs means that they operate much like Barack Obama’s regulatory war on business did. They raise costs and create uncertainty that affects tens of thousands of business decisions—in purchases foregone, sales lost or investment not made. The longer Mr. Trump takes to settle his trade brawls, the greater threat they become to growth and his re-election.
All the more so because Mr. Trump may soon face an economic challenge from a Democratic House, if not Senate. A tax increase would be near the top of Speaker Nancy Pelosi’s policy list, and she might use the need to raise the federal debt limit in 2019 to force Mr. Trump’s hand. Mr. Trump can rightly take credit for the economy’s growth surge so far, but there are risks ahead. He should remove any barriers to growth he can without needing Congress or the Fed.
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