WASHINGTON: President Donald Trump’s economic and tax agenda assume growth in the world’s largest economy will see a sustained rebound to double the current rate.
But analysts are casting doubt on that goal given the current tepid pace of the American economic expansion, as well as limitations on the potential to fuel growth — especially without also igniting inflation.
While the Commerce Department on Friday revised the estimate of first quarter growth up by a hearty half-point to 1.2 percent, that is still well below the 2.1 percent in the final quarter of 2016.
First quarters are generally slower than the rest of the year, and consumption in the January-March period while doubling to 0.6 percent growth, was still at its lowest point since the end of 2009.
Business investments were stronger, thanks in no small part to a stunning 28.4 percent spike in spending on structures, like oil wells and mines, a sector the Trump administration hopes to boost.
But “Trump-o-nomics” is founded on the belief that growth will hit three percent and stay there for a decade.
Indeed, this assumption underlies the Trump administration’s recent fiscal plans.
Economists do expect growth to pick up in the second quarter, with the Atlanta Federal Reserve Bank’s “nowcast” on Friday predicting expansion at an annual rate of 3.7 percent.
“Second quarter growth could be in the three percent range, but that would still only mean the first half growth rate was not much more than two percent,” economist Joel Naroff wrote in a research note.
“If the economy is going to grow at three percent for as long as the eye can see, businesses better spend lots of money on capital goods,” he continued.
“Well, that is not happening.”
The Trump administration expects to goose the economy by slashing taxes and regulations and favoring exports.
“I’ve heard lots of economists tell us why that’s not going to be the case,” Treasury Secretary Steven Mnuchin said Thursday in Senate testimony.
“But we are committed to having policies to get us back to what are appropriate growth rates in this country.”
Still, history does not help his case: on average since 2000, annual growth in the United States has not exceeded two percent, thanks to the Great Recession of 2008-2009, sluggish productivity growth and an aging population.
And the problem of an older population cannot improve if Trump continues to pursue the harsh immigration practices he campaigned on.
Over the period since 1947, annual growth averages 3.2 percent.
Mnuchin was put on the defensive in a recent Congressional hearing by Democrats who faulted the math in the draft budget released last week.
Some vigorously derided the administration’s double counting of growth projections.
Mnuchin repeated the White House position that the tax cuts will finance themselves without increasing the deficit thanks to higher economic growth which in turn will be generated by the tax cuts.
This is a mathematical leap that “would make Bernie Madoff blush,” Democratic Senator Ron Wyden said, invoking the infamous Wall Street swindler, responsible for the biggest Ponzi scheme in history.
New Jersey Senator Bob Menendez called the calculations “very nebulous.”
Mnuchin assured the committee there was no double counting and it was not a mistake, but said “we’re not far enough along in tax reform to have modeled in the impact.”
The Federal Reserve views the administration’s economic plan as a factor of great uncertainty, but which could push growth higher than expected, and would therefore pose an upside risk for inflation as well.
With two more rate hikes anticipated for this year, coupled with the expected reduction in assets accumulated after the 2008 crisis that will further tighten the credit cost, the Fed is likely to hamper Trump’s growth ambitions.