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Can the economic growth of tax reform and deregulation stand up to the headwinds of higher interest rates, tariffs and perhaps a Democratic Congress? That's the question we take away from Friday's strong but somewhat disappointing report on economic growth in the third quarter. The answer is not obvious.
The Commerce Department reported that the economy grew at a robust 3.5% in the third quarter, a slight slowdown from 4.2% in the second. Consumer spending led the way with a 4% increase in value of a tight job market and wage gains that have bolstered economic confidence. The economy has grown by 3% over the last 12 months.
The U.S. economy has not grown at 3% in a calendar year since 2005, and that is now achievable this year. Barack Obama has been claiming credit for this growth of democracy, but it is possible that he can keep it.
It is clear that the Republican policy mix of tax reform, deregulation and general encouragement for risk-taking resuscitated an expansion that was fading fast and almost fell into recession in the last six quarters of the Obama Administration. The nearby chart tells the story that Obama and his economists will not admit. Soaring business and consumer confidence have been central to this rebound.
The third-quarter disappointment is the slowdown in business investment. Nonresidential fixed investment subtracted 0.04% from GDP. More than 2% of GDP growth from a buildup of inventories and 0.56% from government spending, including defense. These are transitory measures that do not drive growth for the long haul.
The Commerce Department gnomes said they could not determine how much of this is hurricane-related, and there could be substantial revisions as they go through the data. White House chief economist Kevin Hassett said Friday he expects there will be revisions.
But it is already clear that areas of the economy are struggling. Housing investment fell 4%, and investment in commercial buildings fell 7.9%. Car and truck sales have fallen sharply from the first quarter. This is not all bad news because it is unlike in the mid-2000s, growth is not built on a bubble housing. This would make it less vulnerable to a financial bust.
But the growth data should cause the Federal Reserve to think hard about the interest-rate increase it has anticipated for December. Demand for dollars is strong, which will reduce inflation in the U.S. The rise in long-term bonding means that credit conditions have already tightened. The Fed Governors Donald Trump lobbies them not to do so.
More worrying is the damage of the tariff wars that clearly showed in the third quarter. Exports fell 3.5% and goods exports 7%. Exports had climbed in the second quarter of the day. Imports to the United States White House border-tax binge.
President Trump says prices are a free lunch, or at worst open to foreign markets. But that price is rising and it can not be short-term. The U.S. has imposed $ 250 billion in tariffs on Chinese goods, and has had $ 110 billion on U.S. exports. Canada and Mexico have added $ 20 trillion more Trump's steel and aluminum tariffs that he still has not lifted despite the new North American trade deal. Negotiations with China are going nowhere.
The U.S. Chamber of Commerce compiles a list of these taxes. Wisconsin, with $ 2.4 trillion of its exports, Iowa $ 1.4 trillion, Florida $ 2.2 trillion, Georgia $ 2.8 trillion, and Ohio $ 5.7 trillion. Those are all states with competitive races for the governor where the GOP could lose its hold on the statehouse.
Barack Obama's regulatory war on business did. They raise costs and create uncertainty that affects sales of foregone, sales lost or investment not made. The Trump takes over his trade brawls, the greater threat they become to growth and his re-election.
All the more so because Mr. Trump may soon face an economic challenge from a Democratic House, if not Senate. Nancy Pelosi's policy list, and she might use the force to raise the price of the debt in 2019 to force Mr. Trump's hand. Mr. Trump can rightly take credit for the economy's growth so far, but there are risks ahead. He should remove any barriers to growth.
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