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This week in Trumponomics: The economy booms

Rick Newman
Senior Columnist

President Trump got the big number he was looking for this week, when the government announced the economy grew by 4.1% in the second quarter. Trump has promised to boost GDP growth above 3% on a sustained basis, and his hope for the second quarter was “anything with a four.” He got his wish.

Trump also seemed to back down on his trade threats this week, after a meeting with European Commission President Jean-Claude Juncker. While there was nothing concrete, Trump and Juncker laid out areas of cooperation, with a goal of lowering tariffs on goods going both ways between Europe and the United States. They also said they’d team up to combat trade abuses by an unnamed country that can only be China.

It was a good week for the economy, which is why our weekly Trump-o-meter reads BIGLY, our second highest score.

Source: Yahoo Finance

Strong GDP growth reflected both real momentum in the underlying economy and stimulus policies that will be temporary—and perhaps damaging down the road. On the plus side, consumer spending was up, reflecting a good job market and growing wages. That’s sustainable.

Strong exports contributed to GDP growth as well, and let Trump brag about lowering the trade deficit: “very dear to my heart.” But that’s illusory. Exports surged in the second quarter as soybean producers and others worried about trade wars raced to get goods out of the country before tariffs were likely to go into effect. That means some exports simply happened in the second quarter instead of the third, which means third-quarter exports will probably be lower.

Also nudging GDP growth upward were stimulus effects from the tax cuts that went into effect at the beginning of the year and a big increase in government spending. Those effects are not sustainable. As businesses and consumers reset on account of lower tax rates, year-over-year spending hikes will dissipate. And the temporary boost in government spending will turn into a drag on the economy when that spending splurge winds down in 2019 and 2020.

The tax cuts and spending hikes are swelling the government’s annual deficits upward, with no sign of the increased tax revenue supply-siders say will arrive as growth improves. To some extent, strong GDP growth today is coming from borrowed money that will have to be paid back in the future.

That’s leading some analysts to warn that good times may soon be here and gone. “The economy is not likely to experience a sustained period of four percent growth, much less three percent,” Joe Brusuelas, chief economist for investing firm RSM, wrote to clients. “If one controls for the impact of the one-time increase in government spending, temporary tax boost and exports, that robust topline growth rate is closer to 3 percent. And the year-over-year growth rate is just above the long term trend of 1.8 percent.” If Trump’s trade wars continue or intensify, growth will suffer more. Trump may soon have to be satisfied by anything with a three, and perhaps less.

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Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman

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