Although Republicans finally passed the tax cuts they've been craving during the fourth quarter of the year, GDP growth fell below expectations in the fourth quarter.
Obviously, it's far too soon to say the GOP's tax cuts have failed even if we know they're going to, but the underlying reason growth slowed during the fourth quarter tells us a lot.
Americans spent a lot of money during the fourth quarter over the holidays, but imports also exploded because Americans are buying more than we produce.
Companies failed to produce enough to meet demand last quarter, boosting imports, which grew at a 13.9 percent pace. That was the fastest pace since the third quarter of 2010 and offset a rise in exports, which is being driven by dollar weakness.
International trade sliced off 1.13 percentage points from GDP growth last quarter, the most in a year, after adding 0.36 percentage point in the third quarter.
“The capacity to meet sharply rising demand is just not there,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland Pennsylvania.
“Yes, industrial production should strengthen, but we will also have to get a lot of the rising demand from the rest of the world. So, expect imports to grow rapidly and the trade deficit to widen.”
In other words, the only way we're going to reverse this trend and shrink the trade deficit (and increase economic growth) is by opening up foreign markets to American exports.
But that's not Trump's plan, is it?
Trump withdrew from the Trans Pacific Partnership (TPP) which a dozen nations are preparing to sign without us. Trump is currently considering withdrawing from the North American Free Trade Agreement (NAFTA). These are agreements that open up foreign markets for American exports and Trump is running away from them.
I fear that Trump and the lunatics in his cabinet will misinterpret this information and you might say they already have. Withdrawing from our trade agreements will not reduce imports, it will simply make imports more expensive and reduce the purchasing power of average Americans.
Free trade or not, American consumers are still going to demand things that we simply don't produce here. Trump's new tariffs on foreign washing machines doesn't mean people are going to stop buying those washing machines because if you removed every single imported washing machine in the country, there wouldn't be enough left to go around. Those imports meet a demand that domestics producers can't.
We have little to no reason to think the GOP's tax cut bill will fundamentally change the position we're in. Even conservative studies estimated it could add only 0.5 percent to GDP and that's expected to fade within a year or two. The truth is domestic tax rates were never the real problem because many of our biggest manufactures, such as General Motors and General Electric, never paid taxes to begin with.
It's times like this I'm reminded that Trump went bankrupt running a casino.