Economy

Last Minute Growth Masks Tax Cut Weakness

Written by SK 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.