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Trump's American Economic 'Miracle' May Have Already Peaked

Trump's American Economic 'Miracle' May Have Already Peaked
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Friday, 27 July 2018 02:44 PM

In declaring that the U.S. economy has entered a new era of faster growth, President Donald Trump is dismissing signals from financial markets and the outlook of economists from Wall Street to the Federal Reserve.

Flanked by his top economic advisers, Trump delivered remarks on the South Lawn of the White House on Friday to celebrate a report that the economy expanded in the second quarter at the fastest pace in four years. He said the economy is on track to reach an annual growth rate of more than 3 percent.

“These numbers are very, very sustainable. This isn’t a one-time shot,” he said. “Everywhere we look we are seeing the effects of the American economic miracle.”

Investors don’t seem as impressed. The dollar fell, stocks were little changed and Treasuries gained Friday after the Commerce Department reported that gross domestic product grew 4.1 percent, slightly short of the consensus estimate. The president had built up expectations by predicting on Thursday that the data would show the economy in “terrific shape.”

“I’m left with a ’meh’ kind of mood as expectations were built up for this to be a strong number--including by administration officials,” said Mazen Issa, a senior currency strategist at TD Securities.

The economy’s solid performance last quarter gave Trump a chance to bask in his policy victories, including the biggest tax overhaul since the Reagan era. It also allows him to change the channel from the growing pressure he faces from an investigation into whether Trump and his associates played a role in Russian interference in the 2016 election.

But few economists expect the U.S. can attain the president’s goal of sustained growth of three percent. Many analysts believe growth will weaken as the effects fade from the tax cuts and a government spending increase.

‘Maxed Out’

“It’s a stretch to get it to 3.0,” said Chris Rupkey, chief financial economist at MUFC Union Bank NA in New York. “It’s a nine-year-old expansion. A lot of the spending we’ve seen is maxed out.”

The president portrays an economy breaking free of its shackles as his administration cuts red tape and lowers taxes. He argues that his hawkish trade agenda, which includes tariffs on steel and aluminum, is attracting jobs back to the nation’s manufacturing sector. Trump visited Granite City, Illinois, this week to celebrate the reopening of a U.S. steel mill.

“We had an audience of steel workers, some of the roughest, toughest people you’ve ever seen, and half of them had tears coming down their faces,” Trump said Friday. “The steel industry is back. They’re open for business.”

U.S. factory employment is growing. That could help Republican lawmakers in the midterm elections in Congress in November. Trump rode to the White House partly on his popularity on Rust Belt states such as Michigan and Ohio.

But the surge in factory jobs started while Barack Obama was president, as companies recovered from the global financial crisis, and manufacturing employment is well below its peak in the 1970s.

More generally, economists question whether the animal spirits awakened by the U.S. fiscal stimulus can continue to boost growth. Private-sector economists predict growth will slow to 2.8 percent in the third quarter, according to Bloomberg polling.

‘Likely Peaking’

Fed officials estimate the U.S. economy’s sustainable long-term growth rate to be 1.8 percent, according to their median estimate in June, though their forecast for this year is a percentage point faster.

That modest assessment of the long-run rate implicitly resists arguments that Trump’s tax cuts will lift the economy’s potential to grow without hitting the speed-bump of inflation, though there’s a range of views among policy makers.

Trump’s victory lap caps a week in which he softened his stance on trade. A deal with the European Union to freeze tariffs blunted concerns that the president’s trade wars could undercut the economy. Still, Trump may have been looking in the rear-view mirror when he predicted a growth boom.

“The economy is currently firing on all cylinders, and that growth is likely peaking,” Bricklin Dwyer, senior U.S. economist at BNP Paribas, said in a research note.

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In declaring that the U.S. economy has entered a new era of faster growth, President Donald Trump is dismissing signals from financial markets and the outlook of economists from Wall Street to the Federal Reserve.Flanked by his top economic advisers,
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Friday, 27 July 2018 02:44 PM
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