Comment on Revised U.S. GDP

March 28, 2019

U.S. quarterly GDP growth in the final quarter of 2018 got revised downward by 0.4 percentage points to 2.2% annualized. Despite the positive spin from government officials, that’s below the average 2.7% per annum pace of the whole Trump presidency thus far. Moreover, personal consumption, which comprises about 70% of GDP, contributed disproportionately by accounting for five-sixths of GDP growth last quarter. Residential construction slumped at a 4.7% rate and 3.3% from a year earlier. Government expenditures contracted for the first time in over a year, and net foreign demand exerted a 0.1 percentage point drag on GDP growth, offsetting a minuscule boost from inventories. The strong initial boost from a lower corporate tax rate on non-residential business investment has not been sustained. After climbing about 10% at an annualized rate in the first half of 2018, this component of demand slowed to an expansion pace of 3.9% in the second half.

The policy agenda of President Trump carries several downside GDP risks even though it is presented as a plan to lift growth to 4% or above.

  • Higher tariffs are a recipe for lower growth even if they succeed in lifting the U.S. relative position vis-a-vis other economies, which in the process may experience more dramatic deterioration in net exports than does the United States.
  • A xenophobic policy on immigration depresses growth in available workers, making America’s potential rate of growth more dependent than ever on growth in labor productivity.
  • Undermining the existing Affordable Health Care without a suitable substitute plan will leave the American workforce less protected, more sickly, and ultimately less productive.
  • One doesn’t need a weatherman to see that the costs of climate change are climbing exponentially. Stonewalling efforts to address the problem are laying the seeds for America to fall behind other nations in the race to develop and apply renewable energy sources.
  • Hostility to technology companies because they happen to reside in blue states similarly risks slowing a segment of the U.S. economy that has been a growth leader.
  • The deregulation of financial services promotes economic growth until the system suddenly self-destructs. It’s not coincidental that the Great Depression and Great Recession happened on Republican watches.
  • At extremes, highly unequal distributions of income and wealth in and of themselves correlate with slower potential overall GDP growth. The United States already had crossed a red line in this regard before the Trump tax cut bill passed. Such will make this factor even more detrimental to economic growth in the future.
  • President Trump admires authoritarian political leaders. Aside from China, however, economic growth in such countries tends to fall short of potential, and even China is now entering a new era with a less rapid normal growth rate. Political repression with assaults on truth, science, and basic decency exert a real toll on economic growth.
  • A lot can be covered up by militarization. The short-term positive effect of heavier spending on the military can be enormous. One need only check out the robust rise of German real GDP throughout much of the 1930s. But like the earlier point about financial deregulation, the short-term high can lead one down a  very costly path.

Economic expansions generally do not end because of old age. By the same token, a secret hasn’t been unlocked for abolishing interludes of recession . And with the current U.S. economic upswing closing in on a record for longevity, it’s safe to say that the risk of recession within the next 2-3 years isn’t shrinking. In spite of the extreme length of the current business expansion, U.S. economic growth since the end of 1999 has only averaged 2.2% per year compared 3.7% over the previous half century. President Trump wants to outperform even that earlier norm, but he’s going about doing so in the wrong way.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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