Administration officials are already taking victory laps. White House economic adviser Larry Kudlow said last week that the economy is starting to grow 4 to 5 percent and others will copy the nation. He also hinted at more steps on taxes, citing some lawmakers’ wish to make individual cuts permanent.
For now, the fiscal stimulus is adding steam to an economy that’s already come a long way in the nine years of this expansion and is poised to surpass $20 trillion in nominal dollars. Unemployment near the lowest level since 1969, steady hiring and low inflation also are bolstering consumption, which accounts for about 70 percent of GDP. Lower taxes and still-easy monetary policy are supporting investment and buoying corporate profits.
That’s helped put a floor under the stock market even as tariff threats cloud the outlook for growth and inflation. Besides, the U.S. also is the brightest spot among developed economies, offering a tailwind to the dollar, whose strength Trump said Friday is hurting the country.
Even so, the president is counting on keeping growth going at full swing as he escalates the trade war with China, the European Union, Canada and Mexico. Rates on benchmark 10-year Treasuries reflect the challenge. The flattening yield curve signals investors are skeptical that the economy can handle much higher rates from the Fed. Trump attacked the central bank’s hikes last week, breaking with two decades of bipartisan White House tradition of being hands-off with the Fed.
A more immediate concern is the twists and turns on tariffs, which are generating bad-news headlines of how higher import costs are hurting goods producers and overshadowing the mileage the administration could’ve drawn from Trump’s tax initiative. Americans’ sentiment is cooling, though still elevated enough to support spending.
If the uncertainty persists, corporate America may slow capital spending, which revved up in recent quarters as a second pillar of growth in addition to consumer purchases.
Many economists nevertheless expect minimal disruptions from the trade spat. Michael Englund, chief economist at Action Economics LLC, said the tax cuts will give a bigger lift to third-quarter consumption, though business investment may be more dispersed through 2018 and housing will have a “slow year.”
While he hasn’t penciled in 4 percent for any other quarter this year, “growth is quite strong,” said Englund, who expects around 3 percent in 2018 and 3.1 percent in 2019. “We’re outperforming a lot of people’s expectations.”
This article was provided by Bloomberg News.