A GDP Warning for the GOP
The U.S. economy grew by a scant 0.7% in the first quarter of 2017, and Republicans should take it as a warning that they’d better start moving on tax reform if they want to prevent a midterm election washout in 2018.
President Trump and other Republicans have been dining out on the improvement in consumer and business confidence since Election Day, and with some cause. But the first quarter results show that sentiment alone won’t lift the economy out of its 2% Obama growth doldrums. The so-called Trump reflation trade in stocks is a bet on pro-growth policies, and that trade can deflate as quickly as it rose if those reforms don’t materialize.
The first-quarter report is also a good window on the state of the current expansion, which will hit its eighth anniversary in June. Consumers have powered most of that growth, and the first quarter was weak in large part because they took a breather. Consumer spending barely rose in the quarter and contributed a meager 0.23% to GDP.
The quarter was saved by a revival in business investment, which rose a healthy 10.4% in the quarter and contributed 1.62% to the GDP increase. This investment was offset by a sharp decline in inventories that deducted 0.93% from GDP, but which will probably rebound in future months. Net exports also helped thanks to faster growth overseas, which ought to caution the Administration about starting trade wars.
All of this shows that avoiding a recession in President Trump’s first term will require a new surge of business confidence and investment. Capital investment has been historically weak in this expansion, but the good news is that there is plenty of money around to invest if the government can give businesses new incentives do so.
More investment can lead to greater labor productivity and higher wages, which in turn will lead to more consumer spending. The weaknesses in this expansion are on the supply-side of the economy, not a lack of demand as the “secular stagnation” theorists have claimed. This is why the GOP’s deregulation agenda is so critical, and tax reform that spurs investment even more so. The disappointing first quarter shows there’s no time to waste.
Appeared in the Apr. 29, 2017, print edition.