WASHINGTON: President Trump returns prosperity to America. The Commerce Department just announced that the economy grew at a 4.1% GDP Growth rate in the second quarter of this year. That is only the third time since the great recession of 2008/2009 that growth reached the 4% level.
On the two previous times that growth exceeded 4%, the economy grew at half that rate for the remainder of the year and finished the year just above 2% annual growth. What will GDP growth look like for the remainder of this year?
President Trump returns prosperity to America; Pessimists say growth rate will fall
According to the mainstream media, a majority of economists are predicting that the 4.1% growth rate was just a blip so that in the third and fourth quarters of 2018, the growth rate will fall below 3%. That means for the entire year, growth will be about 3%, not much better than we have seen in the past few years.
The tax cuts, they say, will have done little to stimulate economic growth. Instead, the tax cuts just increased the income of already wealthy people, since very little of the tax cut went to the middle class. They say 83% of tax cuts went to the top 1% of income earners.
The reality looks much different.
Last December in this space, I argued that, combined with the removal of burdensome regulations, the tax cuts would stimulate economic growth. My forecast was that growth would exceed 4% this year and could be even higher in future years.
Following February job numbers, I noted that the continued strong job market would contribute to economic growth. I also noted that this was just the beginning of a continued strong job market.
By May of this year, the Labor Department reported that for the first time since data on this subject has been collected, the number of job openings exceeds the number of unemployed workers. That meant discouraged workers, who have left the job market because they could not find work, will begin to re-enter.
In June, the economy again added more than 200,000 new jobs, but the unemployment rate increased from 3.8% to 4%. That’s because more than 500,000 discouraged workers re-entered the job market.
In April of this year, the Commerce Department reported that GDP in the first quarter increased by 2.3%, certainly far below the 4% growth rate I forecasted for the entire year.
At that time I noted that first quarter numbers are almost always below the numbers for the year. I continued to forecast that for the entire year, GDP growth would exceed 4%. With the second quarter number of 4.1%, I continue to forecast 4% growth for the entire year is possible.
Will the economy average 5% growth for the remainder of the year?
In order to achieve 4% for the entire year, third and fourth quarters will have to grow about 5%. Is that possible?
It certainly is possible and perhaps even likely, depending on a number of variables. One variable is trade policy. Many economists believe that the high growth rate this quarter was indeed a blip. They attribute it to an increase in the export of agricultural products in order to beat the tariffs which will take effect in the current quarter.
Even if there was an increase in agricultural exports this quarter, the amount is not enough to significantly increase GDP which now averages about $5 trillion per quarter.
Also if China buys less soybeans from the US they will buy more from Brazil, meaning Brazil may not have enough to sell to their existing customers. That means those countries would look to purchase soybeans from the US.
A 5% growth rate for the remainder of the year may be difficult to achieve. But Trump’s tax cut was modeled after the Reagan tax cut in 1982. In 1984, GDP grew at a 7.5% annual rate, so maybe 5% for the rest of 2018 is possible.
Trump’s tariff are simply a negotiating tool designed to bring our trading partners to the negotiating table.
It’s already working. The European Union recently agreed with Trump that both sides should work toward a no tariff policy for all goods. The Mexican president recently announced that he wants to re-negotiate NAFTA quickly.
All signs point to a continued strong economy with economic growth reaching levels where Americans will feel true prosperity again. Something that hasn’t occurred in nearly two decades.