The U.S. Bureau of Economic Analysis released a report Friday detailing economic growth in the first quarter of 2019. The U.S. economy grew by an annual rate of 3.2 percent even though analysts estimated growth to be 2 percent or less. Amidst fears of a global economic slowdown, a report like this serves as a confidence boost — not just to investors, but to the general public.
Breaking down this growth, however, reveals causes for concern. The Trump administration’s actions played a part in the recent economic growth figures. Thus, the subsequent benefits of those actions will most likely be temporary and will not systematically alter the next recession.
First up on the chopping block is President Donald Trump’s corporate tax cut. When he signed that piece of legislation back in 2017, he claimed it would set up the U.S. economy for faster growth over the long term.
Presumably, with a smaller tax burden, firms will be better able to invest in the long term. Yet The Wall Street Journal found Friday’s report suggested weaker gains in business investment compared to higher gains in inventory investment.
Given that 18 percent of U.S. gross domestic product came from business investment in 2018, feeble investment figures are concerning in the long-run. An increase in business investment can lead to short-term and long-term economic growth because more capital improves a firm’s ability to produce products.
Interest rates play a major role in investment. Say a firm buys a new factory using a loan, and the interest they’re charged can be thought of as the price of borrowing money. If the interest rate increases, the “price” of borrowing also increases and deters investment.
With the Federal Reserve signaling the end of interest rate hikes, this may be an overly pessimistic analysis of the business investment.
Next up are the benefits of the U.S.-Chinese trade war. U.S. tariffs placed on Chinese foreign goods likely helped contribute to the recent fall in imports and increase in exports. This change caused net exports to increase and boost GDP.
However, with the trade war soon coming to an end while negotiations between the two countries continue — and with Trump hopefully on his way out — the exact geopolitical circumstances that brought about that helpful boost in net exports will likely not be repeated any time soon.
Consumers, the bloodline of the U.S. economy, also play a major role in economic growth. Consumer spending currently makes up 69 percent of U.S. GDP. This implies that changes in consumer spending can dramatically affect the direction of the economy.
Any decrease in consumer spending, no matter how small, will likely counteract the confidence consumers might gain from this report and confirm the sentiment that a global economic slowdown is underway. However, some lag in this data may buffer this effect because retailers did, in fact, enjoy a pickup in earnings during March after a lackluster February.
Ultimately, Friday’s report does not feel reflective of the shaky U.S. economic landscape. Not only is the yield curve inverted, but also, this long bull run is too good to be true. My academic background may be causing me to be overly skeptical. There is somewhat of a silver lining here.
Alec Young, the managing director of global markets research for FTSE Russell, said he believes the trade uncertainty between the United States and China has put the global economy on edge and resulted in weak economic data from many countries.
Hence, strong growth from an economic powerhouse, if only on the surface, will at least ensure against the belief of further economic turbulence on a global scale.
