Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AmericasSeptember 3 2018

Can the US economy keep growing?

Critics of US President Donald Trump predicted his policies would cause a depression, if not a recession. But second-quarter growth of 4.1% in the US is not a blip, says the US secretary of commerce.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Wilbur Ross

Wilbur Ross

The same left-wing economists and talking heads who said the ‘new normal’ was 2% gross domestic product (GDP) growth also said that US President Donald Trump’s policies would cause at least a recession, and perhaps a depression. From trade to taxes to regulations, they continually advocated for the same policies that have shackled our innovators and robbed our country of jobs, wealth and dignity.

On November 8, 2016, all that changed. The president has ushered in a new period of prosperity for our businesses, workers, ranchers and farmers. There remains much work to be done to implement his bold vision for an American economy that works for all Americans, but in the meantime, his impact is undeniable.

Not a blip

Growth under Mr Trump has been very strong, especially the 4.1% in the second quarter of 2018 at an annual rate. But his critics are saying this economic resurgence is just a blip. They cite the 9.3% or $56bn annualised increase in real exports as evidence of ‘artificial’ economic activity rather than a reflection of economic dynamism likely to persist, unlikely to reoccur. They ignore the non-coincidental fact that inventory investment declined by about the same amount – a negative factor partially offsetting the surge in exports.

After removing trade, inventories, and government spending, final sales to private domestic purchasers, which reflects consumer spending and business investment, rose at a 4.3% annual rate in the second quarter. And critics ignore the lead time in ordering capital expenditures following approval of the new 100% write-off of business investment in Mr Trump’s Tax Cuts and Jobs Act. Such delays are unlikely to be replicated going forward.

A look at the biggest stimuli

Even so, in the second quarter, non-residential business investment grew in the categories of structures (13.3%), equipment (3.9%), and research and development, and other intellectual property (8.2%). The three biggest stimuli are rarely even discussed.

First is nominal personal income, which grew 4.3% at an annual rate in the second quarter. The 1.3 million net new jobs during the first half of 2018, especially the 691,000 in the second quarter, will now be fully in place quarter-over-quarter as we go forward. In estimating macroeconomic effects, assume that these jobs are compensated at an average of $50,000 each.

This amounts to an annualised rate of $65bn in the second half compared with the first half of 2018. This is equal to the 1.3 million new jobs in the first half, multiplied by the $50,000 annualised salary.

Second, wages are rising. The 4.4% annual rate of increase in nominal wages and salaries in the second quarter will be in full force for the succeeding quarters. 

Third, there is room for labour force participation to continue rising now that there are more jobs available than there are unemployed. Labour force participation by 16- to 24-year-olds was 56% in the second quarter and is 14 percentage points below its peak of 70% in 1989. 

To hit that rate today, five million more Americans in that age bracket would have to enter the workforce. If half that number were to get jobs paying $30,000 a year, $75bn more income would result in more than $60bn post-tax income, 99% or so of which would be spent, with a multiplier effect of perhaps two to one as our companies produce more goods and services: $120bn is a 0.59% boost to our total economy. 

If wages rise by 2.5% next year, the net post-tax addition to our economy is another $176bn or 0.86%. Meanwhile, these increases in income will likely result in increases in capital expenditure and consumer spending.

The trade balance contributed a positive 1.06 percentage points to the 4.1% GDP growth, but this was offset by a one percentage point decline in inventories. Along with the 4.3% annual rate of increase in nominal personal income, real personal consumption expenditures grew at 4% in the second quarter, contributing 2.69 percentage points to overall real GDP growth. 

Given the continued growth in net job creation, the upward movement of wages, and the lower tax rates, personal consumption expenditures are likely to continue to be strong – especially as there is room for the saving rate to decline. With the personal saving rate in the second quarter at 6.8%, annual personal saving remains over $1000bn, with the increases in consumer spending.

All told, these facts should give the business community and the American people confidence that, under Mr Trump’s leadership, it was the ‘new normal’ that was a blip – not the resurgence of American growth. 

All statistics are either federal public data or statistics derived from federal data by the secretary or the US Bureau of Economic Analysis.

Was this article helpful?

Thank you for your feedback!

Read more about:  Americas , Americas , US