Trump and his team are eager to take credit for a reported 4 per cent growth. But they shouldn't celebrate too soonby George Magnus / July 30, 2018 / Leave a comment
The US economy, as we know, has been on a bit of tear recently—confirmed last week by the announcement that it expanded by a little over 4 per cent at an annualised rate in the second quarter, the fastest pace in four years. President Trump and his supporters were quick to cheer and take credit thanks to the government’s tax cuts. Allowing for a fall in inventories, demand (or, technically, real final sales) grew by just over 5 per cent per annum.
Yet, we can also consider this achievement in a calmer and more reasoned way. Faster growth is good news—but it won’t last long, and interest rates are still going to go up.
Remember first that 4 per cent growth is rare but not impossible in a modern, sophisticated economy. It happened 4 times during the Obama administration, once as the economy snapped back after the recession following the financial crisis, then again at the end of 2012, and in the middle quarters of 2015.
Second, the annual, or year-over-year growth rate, also rose but from 2.5 per cent in the first quarter to 2.8 per cent. This a more reliable view about how the economy is growing.
Third, note that 4 per cent annualised growth cannot last unless the economy’s potential growth rate is, itself, higher. It’s a bit like driving your car. The distance capacity (or potential) is set by the car’s physics and petrol tank size. The only way you can change it is to lower it by driving too fast or badly.
Similarly, the US economy’s 1.8-2 per cent growth potential is set by productivity and labour input. It can speed up for a while by using economic capacity more intensively, but unle…