The end of the Trump boom?

According to Donald Trump and his economic Nightmare Team (Mnuchin!  Kudlow!! Navarro!!!), this presidency has been marked by a surge in growth inspired by the administration's tax cuts and regulatory reform, with a recent dose of tariffs on top.  The truth has always been that Trump inherited an economic expansion that began during the Obama administration and has continued almost without interruption for the better part of a decade. That expansion is now very long in the tooth by historical standards.  Since it's always "the economy, stupid" come election time, prolonging the expansion for a few more quarters must be top of mind for the big thinkers at the White House. 

Data released by the Commerce Department this morning show that US GDP grew at a 2.1 percent annual rate in the second quarter of the year, down from a 3.1 percent pace in Q1.  That was above economists' expectations; even so, two of the past three quarters have seen growth well below the average rate posted during this expansion.  Moreover, the Commerce Department made substantial revisions to prior data, which had the effect of boosting reported growth for 2017 while cutting it sharply for 2018.  If there ever was a "Trump boom", it seems to have fizzled by the end of his first year in office, with growth rates falling back toward their longer term trend.   

There is little objective reason for panic here.  Consumer spending, always the principal driver of US growth, is rising at a solid pace, and with unemployment low and wages rising, that should continue.  In other respects, however, the malign effects of Trumpian economics are starting to make themselves felt. Several categories of investment spending fell in the quarter, suggesting that the incentives supposedly provided by tax cuts and deregulation are fading -- if indeed they ever existed.  In addition, exports fell in the quarter, a trend that can only continue and worsen as Trump continues to pick fights around the world.

The policy implications of this should soon become clear.  The growth slowdown reported today should give the Fed all the cover it needs to cut interest rates next week, a move it has already strongly signalled.  Fears over the possibility of a more severe deceleration may also lie behind the budget deal that has been reached between the White House and Congress.  From a fiscal standpoint it's a stunningly irresponsible deal, but neither side wants to take the blame for a budget fight and possible government shutdown that could drive the economy over the edge. The future, as always, will have to take care of itself.