Many journalists and economists are still skeptical about the impact of tax reform and deregulation, in spite of current economic growth and the lowest rate of unemployment since before the Great Recession.
Washington Post columnist Catherine Rampell, for example, predicted that the 4.1% growth we saw in the second quarter of 2018 is an anomaly and that we will have slow growth ahead.
She acknowledged that the economy “puttered along” with 2% growth for a few years and that President Obama was the first president ever to not experience growth of at least 3% during any year of his presidency.
“GDP (gross domestic product) is noisy, bouncing around a lot from quarter to quarter,” she wrote, adding that what matters is sustainable growth.
And she’s right. But, as we pointed out yesterday, the average quarterly growth rate during the Trump presidency is now 2.9%, which is almost 40% higher than the average rate during the Obama years.
“Freaking Out” Over Tariffs?
Rampell also noted that businesses “freaking out” about Trump’s trade tariffs “likely pulled forward some of their activity,” purchasing raw materials and stockpiling them at today’s prices before tariffs take effect, creating a one-time surge in growth.
Yet Wall Street Journal columnist Kimberley Strassel wrote that inventories overall were a drag on growth.
“The acceleration has been driven by business investment, which increased 6.3% in 2017 and has averaged 9.4% in the first half of 2018,” according to Strassel. “This investment surge has come in productive areas like equipment and commercial construction. It has not come from padding inventories that have to be sold down, or in a housing mania like the one that drove growth in the mid-2000s. Both housing and inventories subtracted from growth in the second quarter.”
In contrast, Strassel wrote, “Nonresidential fixed investment in particular had slumped to an average quarterly increase of merely 0.6% in those final two years of the Obama Presidency.”
Rampell also suggested that sustained growth should cause an increase in wages. Wages fell during the Great Recession and stagnated for eight years afterward. Rampell says they are still stagnating.
Where Are the Raises?
“Where are the raises?” Rampell asked. “Output may have swelled last quarter, but paychecks did not. Adjusted for inflation, average hourly earnings were flat in June compared with a year earlier, according to the Labor Department.”
Yet Strassel wrote that, “The increase (in consumer spending) was due to an upward revision in wages and salaries and jumped to 6.7% from 3.4% for 2017 and averaged 7% in the first half of this year. That’s about $500 billion more in the pockets of Americans than previously estimated and helps to explain why consumer spending has remained strong.”
We noted in March that wages have started to recover, but in contrast to Labor Department statistics cited by Rampell, Glassdoor’s Local Pay Report noted that median base pay for U.S. workers increased 1.6% in June, which was the strongest growth so far in 2018.
Mike Solon, a former aide to Republican Senate Majority Leader Mitch McConnell, wrote in The Wall Street Journal that, “Since the tax cut, the Labor Department reports that worker bonuses have hit the highest level ever recorded. The Commerce Department reports that wages and salaries are growing almost 25% faster under President Trump than under Mr. Obama.”
So will the economy continue its strong growth? It depends on what you read, but it seems clear that tax reform and deregulation are creating strong growth. We only hope that trade tariffs don’t bring it to a halt.