President Donald Trump’s economic optimism has been a big part of his appeal. On the campaign trail, he promised a return to 3 percent GDP growth. And now in the White House, one of his first announcements was a commitment to return to a 4 percent growth rate (along with creating 25 million new jobs over the next decade).
That ambition -- necessary for political reasons but also to give a modicum of fiscal reality to Mr. Trump’s tax reform and spending plans -- has been a primary motivator to the stock market’s historic post-election rise to record highs.
The trouble is: Although it’s admittedly very early in the Trump administration and despite sky-high measures of business, consumer and investor confidence, the real economy isn’t playing along.
The Atlanta Fed’s GDPNow real-time tracking estimate of first-quarter growth stands at just 0.9 percent after Wednesday’s disappointing retail sales report (chart below). And this comes in the context of another Federal Reserve interest rate hike, the second in just three months and a massive acceleration from the prior pace of just two rate hikes in the last 10 years.
Compare this to survey-based measures like the Institute of Supply Managers’ growth estimate, which is pointing to GDP of around 3 percent, according to Oxford Economics.
That sort of growth doesn’t jibe with a legislative process in Washington that’s extremely slow and painful, especially in today’s ultra-partisan environment. Just look at the internal divisions within the GOP itself over the health care reform legislation its leadership is struggling to push through Congress.
And that means any of the president’s pro-growth efforts will be a long time coming. Plus, with the Federal Reserve expected to raise interest rates by two more quarter-point increments before the end of the year, the currently weak economy is about to face growing headwinds.
Mr. Trump’s team, however, remains committed to his optimistic growth target. Chief White House Economic Adviser Gary Cohn said the administration plans to outperform its forecasts. And even though 3 percent annual growth hasn’t been achieved since 2005 and President Obama wasn’t able to hit that mark during at least one year of his terms, Treasury Secretary Steven Mnuchin said that target is achievable.
“I believe we can get to sustainable economic growth of 3 percent or more,” Mnuchin said Thursday in Berlin during a press conference with German Finance Minister Wolfgang Schaeuble.
The Fed’s updated projections for economic growth through 2019, released on Wednesday, forecasts a 2.4 percent growth rate at best in the next few years.
Even if Mr. Trump were able to wrestle his legislation through Congress, he would bump up against the economy’s lowered “speed limit.” Potential growth is being held back by a variety of reasons, including demographics (aging baby boomers), underinvestment in equipment by the corporate sector in recent years (preferring capital returns via buybacks and dividends) and tepid labor productivity growth (as the labor market tightens, remaining workers are of lower quality in terms of output).
Indeed, the Fed’s own estimate of long-run real GDP growth is just 1.6 percent to 2.2 percent.
Gluskin Sheff economist David Rosenberg points to early 2011 as a period similar to now: Survey data was running hot amid widespread enthusiasm about the economy as the Fed was just months into a second round of quantitative easing (bond buying). Yet people had it very wrong: First-quarter 2011 GDP growth clocked in at a near-recessionary -1.5 percent annualized rate.
Survey-based enthusiasm collided with the hard data weakness. Unfortunately for the growth bulls, according to Rosenberg, “this story will prove to be true once again.”