Morici: The sizzling US economy

Peter Morici

The economy is delivering for Donald Trump, but the liberal media and economists have taken to trashing his performance as a sleight of hand or mirage.

When the Commerce Department reported 4.1 percent GDP growth for the second quarter, New York financial sector economists,  not known for their conservative leanings, quickly rebutted that strong growth is not sustainable and President Trump’s trade wars put the recovery at risk. The Oracles of Wall Street cranked draconian assumptions about Mr. Trump’s tariffs into their forecasting model, as if he had not just accomplished detente with the EU and agreement to form a united front against Chinese protectionism.

They do not even seem to read the newspapers up there – or at least only the ones who repeat their echo chamber utterances. Politico, citing their polemical nonsense, labeled the second quarter growth figure as “Fool’s Gold.”

And cynical polemics it is. I can make Mr. Trump’s policies look like the roads to heaven or hell by pumping the “correct” assumptions about tariffs into their models. It’s as if knaves on Wall Street were campaigning for the Blue Wave and Alexandria Ocasio-Cortez.

Let’s do something novel – how about some facts.

One quarter’s growth does not mean a lot. It’s like baseball, some days players get three hits and other days none – what matters are their averages over the season and their careers. President Obama’s average was much advantaged by inheriting an economy in a mess – growth usually gets a big bounce after recessions but in his case only a bleep materialized. His penchant for regulation and taxation  do not get me into the identity politics curriculum he encouraged at universities that are now turning out graduates incapable of professional work – created an economy that averaged a whopping 1.9 percent annual pace.

Through the second quarter, the Trump economy has averaged 2.7 – for the less numerically inclined on Wall Street and in the liberal media that is more than 40 percent better. Mr. Trump was overly optimistic in asserting we could look forward to a regular diet of 4 percent growth going forward.

Dissecting the numbers, the second quarter GDP estimates indicate some sources of strength not likely to repeat – in particular, unusually robust export growth partially due to foreign customers buying U.S. products before tariffs hit. However, that only goes so far – the Chinese have been clamping down on U.S. exports in anticipation that trade tensions escalate to try to rattle Mr. Trump before he acts on his bolder threats.

What was really missing from the second quarter numbers was the kind of surge in investment CEA Chairman Hassett and Treasury Secretary Mnuchin promised from their corporate tax cuts.

Objective research – published in referred academic journals long before Mr. Trump was a burr in New York financiers’ saddles – indicate that the 15 percent cut in taxes on business profits enabled by corporate reforms should increase investment between 7.5 percent and 15 percent every year going forward. And in the current environment of deregulation, the higher figure should more closely apply.

In addition, new home construction has been weak recently. We are witnessing one-time adjustments in property values from limits on property tax and mortgage interest deductions imposed by the new tax law – the impacts of those on new home construction should abate soon.

And trade tensions are dampening foreign investment in U.S. real estate. Though purchases of existing property do not count in GDP, reduced foreign interest is depressing demand overall in the housing sector and is an important reason new home sales and construction slowed.

Resolving trade tensions with Europe will prove important and should encourage a rush of new investment from our old allies into America. This should offset diminished interest by Chinese buyers in California homes.

On the plus side, investments in addition to business inventories fluctuate dramatically from quarter to quarter and were terribly depressed this spring. Those subtracted a full percentage point from the second quarter GDP growth estimate and are almost certain to rebound this summer and fall.

Wrapping it all together, average growth at about 3 percent is possible and likely going forward. As measured against the Bush and Obama presidencies that would make Mr. Trump a 300 hitter with power in baseball parlance.

Yup the Donald is Hall of Fame material – colorful, just like the Babe.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.