Trump goal of 3 percent economic growth is achievable and sustainable

Consumer strength was reflected across a variety of metrics, including a 9.3 percent increase in purchases of durable goods like washing machines and cars and 5.2 percent growth in nondurables including clothing and gasoline.

Yes, the tax cuts will sunset in the coming years and their impact will fade. But economic growth at 3 percent, coupled with a rise in wages that should happen as the labor market tightens more, means that elevated consumer confidence should endure for years.

Businesses spent too, sending the key nonresidential domestic investment up 7.3 percent to continue a big 11.5 percent surge in the first quarter. Corporate tax cuts are permanent, meaning there’s no reason that business investment should see meaningful retracement anytime soon.

“Consumer activity picked up markedly after a slow start to the year and business investment, while cooling from more robust levels, remains in positive territory,” Lindsey Piegza, chief economist at Stifel, said in a note. “Overall, there are clearly a number of factors suggesting the economy is firmly on solid – albeit far from robust – footing, at least for now.”

Piegza worries that the recent slump in the housing market could be the culprit dragging down growth ahead, a significant potential headwind that will have to be watched.

At least from a numbers perspective, though, there’s a big plus out there — a coming inventory jump that can have outsized repercussions on the data. Inventories actually fell $28 billion in the quarter, suggesting that a rebuild ahead will sustain the momentum.

Excluding the inventory drag, the actual GDP gain would have been 5.1 percent in the quarter, according to multiple analyses.

“The drag from this component was worth a full percentage point in Q2 and we expect it will act as a significant add to output in the third quarter,” Tom Porcelli, chief U.S. economist at RBC Capital Markets, said in a note. “Thus top-line growth is likely to come in close to 4% again in Q3, virtually assuring another ‘victory lap’ from the administration.”

There remain a multitude of obstacles, of course.

Joe LaVorgna, chief economist for the Americas at Natixis, sees productivity and the Federal Reserve’s interest rate strategy as two of the key areas to watch.

A jump in productivity, even to 2 percent, would make a major difference in continuing the momentum. Conversely, a Fed overly intent on heading off growth before financial imbalances occur could be the economy’s biggest foe, he said. The central bank is expected to hike interest rates twice more in 2018 and perhaps three more times in 2019.

“The tax cut and the deregulation, together it is possible that could lift productivity growth, even though it fees like we’re late in the business cycle,” LaVorgna said. “With good policy, we can continue to generate better growth than we have seen, if you get this endogenous lift in productivity.”

LaVorgna said his confidence is “fairly high” that 3 percent growth can continue.

“That’s a 50 percent improvement from trend,” he said. “It may not seem like a lot over a longer period of time, but 3 percent is a big deal. Is 3 sustainable? Yes.”

Be the first to comment

Leave a Reply

Your email address will not be published.