Last Minute Growth Masks Tax Cut Weakness

JM Ashby
Written by JM Ashby

Trump and Speaker Paul Ryan did a victory dance this morning to celebrate the news that the economy grew at an annualized rate of 4.1 percent during the second quarter of the year, but if we look at the numbers behind the extra growth we can see that their policies had little do with it.

Well, that's not entirely true. It appears that Trump's trade war did lead to a brief increase in growth, but not because it's good policy.

Government data shows that a last minute surge in consumer spending and exports led to increased growth as business investment actually fell by nearly 3 percent.

From the Wall Street Journal:

Consumer spending accelerated to a 4% annual pace of growth after a sharp pullback in the first quarter. Government spending also accelerated at both the federal and state levels.

Business fixed investment increased 5.4% in the second quarter, down from a 8% gain in the first three months of the year.

Residential investment declined for the second straight quarter but at a slower pace than the first quarter.

The trade gap narrowed, boosting GDP. But this was offset by a downturn in inventory investment.

To put it more simply: inventories fell because companies rushed to export as much as they possibly could before Trump's tariffs officially hit the books. Investment is also down because no one knows what Trump is going to do next and the GOP's tax cuts have not led to a meaningful increase in investment.

Americans are still buying things because that's what we do and deficit-spending is soaring because that's what Republicans do.

Rather than see this as a sign that he should back off and let the economy do what it's going to do on its own, Trump will probably see this as an opportunity to go ahead with more tariffs. There's virtually no chance he'll listen if an adviser warns him that second quarter growth may have been an anomaly. Trump is not capable of learning the right lessons.

If Trump goes through with his tariffs on cars and more products from China, the consumer spending that fueled economic growth during the second quarter will vanish.

Second quarter figures do not reflect the direct impact of retaliatory tariffs on American exports which have only been on the books for 3 to 4 weeks.

  • Badgerite

    Good bet that any increase in consumer spending is done in anticipation of price increases to come. Buy now before the shit hits the fan and you can’t afford to buy.

  • muselet

    Companies exported as much as possible ahead of the tariffs, companies stockpiled raw materials as much as possible ahead of the tariffs, companies invested as much as possible ahead of the tariffs. Those are one-time boosts to the economy; anomalies, if you will.

    The next couple of quarters seem certain to show something very different. It will be bleakly amusing to see how Donald Trump tries to blame Barack Obama for the economy falling off a cliff.


  • Ceoltoir

    This is being called the Wile E. Coyote economy, everyone knows what happens when the Wile looks down…

  • ninjaf

    I guess the silver lining is that the third quarter results will come just in time for the election, unless car makers do with cars what farmers did with soybeans. But I don’t see that happening since this time frame is when plants are shut down and retooled for the new model year’s cars. I guess they could skip shut down but I imagine a lot of workers would be pretty upset about that.

  • gescove

    Economic news like this can lead to a bit of cognitive dissonance. Just one example. We know Midwest farmers are getting hit hard by Chinese tariffs on soybeans. Yet soybean exports were way up last quarter. Why? Because importers were stockpiling ahead of tariffs. But the WH will take a victory lap by looking backwards at a blip and not acknowledging the misery cooked into their policies ahead.

    • JMAshby

      At this moment (about 3:10 pm est) the Dow, Nasdaq, and S&P are all down so apparently even a 4.1 percent growth figure isn’t blowing their skirts up. In previous years, that kind of growth would lift almost every stock up but it isn’t today. The market will close in about 45 minutes.

      Investors know how to read this information far more clearly than anyone in the White House does. I feel like even I know how to read this information better than anyone in the White House, and I’m nobody.

  • Aynwrong

    We all know how this going to end. It’s just matter of when, and how deep the damage the goes this time.