The first estimate for fourth quarter 2017 U.S. GDP growth, released by the Bureau of Economic Analysis (PDF) on January 26, came in at a disappointingly low 2.6%. The first quarter, the last totally owned by the economic policies of the Obama administration, was at the typically low Obama-era level of 1.2%. The second and third quarters had growth of 3.1% and 3.2%, respectively. The average of just the last three quarters was 3.0%. For the entire year, the average growth rate was 2.3% year-over-year. It did not take long for some progressive pundits to claim this shows Trump’s economic policies will not give the growth he promised after all. Will economic conditions cause GDP growth to stall?
The Progressive Take
A typical progressive reaction was given by Michael Hiltzik writing for the Los Angeles Times.
What’s going to be most interesting about the latest figures is how Trump and his clique will react. I reported in May that Trump was “dreaming” if he expected sustained growth of more than 3% and explained why that was unlikely, though not impossible. After the figures came in for the second and third quarters, my email in-box and Twitter feed filled up with nyah-nyah messages from his fans, who didn’t seem to understand that three months, even six months, of annualized growth of 3%-plus wasn’t the same as 12 months.
MSNBC pundit Steve Benen generously noted,
To be sure, 2.6% growth is consistent with a healthy economy. Indeed, this report suggests the full year’s growth for 2017 will also be around 2.6%, which will be up from 2016, and tied with 2015.
However, Mr. Benen then adopted the general progressive meme: Trump’s belief he could get sustained growth up to something greater than 3% was a pipe dream.
But it’s also a reminder that the Republican president’s vow of 4% annual growth rates really wasn’t a good idea. As the economic recovery that began in 2009 continues, Americans have reason to be pleased with the overall health of the economy, but Trump routinely promised “4% annual economic growth” – and in some cases, he suggested his policies could push growth to as high as 6%.
A Neoliberal Take
Yet, neoliberals can find multiple reasons for believing that Trump might well have the last laugh. Let us ignore for a moment the fourth quarter GDP figure is just a first estimate that can easily be adjusted upward. Of much greater interest is looking at the factors that held down the last quarter’s growth rate.
As it turns out, the decrease in growth from the third quarter was due to a draw down by companies in their inventories, and to an increase in the trade deficit with other countries. Using data from the Bureau of Economic Analysis, MarketWatch.com produced the bar chart below showing the major contributions to GDP growth over 2017.
In the fourth quarter, the draw-down in inventories contributed -0.67% and trade -1.13% to GDP growth, while consumer consumption gave us +2.58%, investment +1.27% and government +0.5%. Add all these contributions together and you get the quarter’s growth of 2.6%.
First, let us think about the negative contribution provided by the change in inventories. There are two different ways of interpreting this development: one way fortunate and the other unfortunate for the economy. The unfortunate possibility is a declining economy causes pessimistic producers to cut back on their production and to satisfy existing and declining demand from stockpiles, paring back on their inventories.
Happily, the far more fortunate interpretation is also the one more consistent with current economic indicators. In this view, producers greatly underestimate demand for their goods and do not produce enough to meet that demand. This forces them to draw down their inventories in response. Because they have mistakenly pulled back on production, the growth in GDP is reduced.
What is the evidence for this explanation? First, look at the big changes in the contributions to GDP growth from consumption. The bar chart above shows the contribution decreased from 2.24% in Q2 to 1.49% in Q3. It then increased to 2.58% in Q4. The decreasing contribution from Q2 to Q3 would then motivate companies to reduce production in Q4 in anticipation of further reduced demand in the last quarter. Instead, the producers were surprised with demand ballooning yet again.
Now look at the actual quarterly annualized real personal consumption increases, rather than their contributions to GDP growth.
The red line in this plot is the trend line for personal consumption expenditures during the last two years of the Obama administration, while the green line is the trend line for Trump’s first year. The increase of the second quarter 2017 over the first quarter was 3.3%, which then declined to 2.2% in the third quarter, only to climb to a very healthy 3.8% in the final fourth quarter. It was not for want of economic demand that GDP growth declined in the fourth quarter. It was the miscalculations of demand by companies that created the reduced growth. Miscalculations they will undoubtedly quickly correct.
The final factor dragging down fourth quarter GDP was an imbalance between exports and imports.
This negative drag was not created by weak exports, but by unusually strong imports. The fourth quarter growth in exports was a healthy 6.9%, but the growth in imports dragging down GDP was an exceptional 13.9%! This degree of imbalance is very unlikely to be repeated often in the future for reasons discussed in the next section.
The Economic Prospects for 2018
You should keep in mind that almost all the economic improvements in the last year were due to presidential executive orders partially deconstructing the regulatory state. The Tax Cuts and Jobs Act was not passed and signed into law until December, and did not come into effect until January of this year. Yet, the reduction in profit-killing economic regulations was enough of a motivation to increase corporate investments in capital goods and durable goods.
Note in particular capital goods investments by corporations did not really begin to increase until around the time of Donald Trump’s election. At first, such investment growth could only be fueled by hopes that Republicans would improve the economic environment. However, as Trump began to take apart the regulatory state, companies could point to objective policy changes making it easier for them to create profits.
One of the major missing elements for prosperity through most of the Obama era was corporate investment to grow their own productive capacity. Indeed, it is not at all a stretch to claim that capital was on strike through much of Obama’s administration. Shades of Ayn Rand’s Atlas Shrugged! Instead of using available capital to make needed investments, corporations were more likely to buy back their own stock or to pay dividends. Some companies found the U.S. economic environment for their capital so unhealthy they decided to flee the United States altogether. Every time a company abandoned the United States for a foreign country, they took along with them intellectual property, capital, and jobs.
This dismal economic picture is now being repainted through Republican neoliberal policies. Now that the Tax Cuts and Jobs Act has become law, companies have far more reason to invest, hire, and reward their employees. Grover Norquist’s Americans for Tax Reform has compiled a list of 316 companies, motivated by the tax reform act, that have announced bonuses, raises, or 401(k) hikes so far. At least as important are the pledges for future investment in the United States, not just by American companies, but by foreign corporations as well. Some of the more important examples are:
- Apple, Inc: Apple has announced it will make a $350 billion “contribution” to the U.S. economy over the next five years, create 20,000 new jobs, and open a new campus. It also says it will pay about $38 billion in taxes to repatriate profits from overseas. This implies it will bring back almost all of its $250 billion held in overseas accounts. The new tax code requires a 15.5% repatriation tax for 2018 only, after which the U.S. will have a territorial tax system under which overseas profits will not be taxed.
- SoftBank of Japan: Will invest $50 billion in U.S. businesses and create 50,000 new jobs.
- Exxon Mobil: This oil producer will invest $20 billion on chemical and oil refining plants on the U.S. Gulf Coast between 2017 and 2022. The new investment should create 35,000 temporary construction jobs and 12,000 permanent jobs.
- J.P. Morgan Chase: This banking company will invest $20 billion over five years to expand its workforce, increase its hourly pay, and open 400 new branches in the U.S.
- Bayer AG: This German company will invest $8 billion in American R&D and will create an additional 3,000 high-tech jobs in the U.S.
- Foxconn: This Taiwanese electronics company will invest $7 billion to expand U.S. production and create 50,000 jobs.
- Walmart: Will invest $6.8 billion in the U.S. and create 10,000 new jobs.
- AT&T: AT&T said that if the tax reform bill were passed, it would invest an additional $1 billion in the U.S. It also pledged it would give more than 200,000 union workers a special bonus of $1,000 each.
- Boeing Corporation: This aerospace manufacturer immediately committed after passage of the tax reform act to an additional $300 million in investments. It also committed $100 million each for workforce development, infrastructure and facilities enhancements, and for corporate giving.
- Volvo: This Swedish car company, under the influence of Trump’s policies, is doubling its investment in a Charleston, South Carolina factory to a total of $1 billion. A total of 4,500 jobs will be created.
Of necessity, this is a greatly shortened list from what it could be. The lesson you should take away is if government makes it easier for companies to make profits, those companies will be more than happy to seize the opportunity to invest in new production and workers. Under neoliberal policies, companies have a greater motivation to use capital in this way, rather than merely buy back their own stock and pay dividends.
In addition, even before the Trump administration, some U.S. manufacturing companies had started to return to the U.S. The motivation appears to have been primarily increasing labor costs in places like China, along with increasing transportation costs. However, now that U.S. corporate taxes have become almost competitive with the rest of the world and the regulatory burden has been reduced, we can expect the returning trickle to become a flood. This is the fundamental reason why we should expect trade deficits to become increasingly less of a drag on GDP growth, the way it created a drag in Q4 of 2017.
The combination of decreases in U.S. economic regulations with the influence of tax cuts and reforms will cause a huge reduction in government’s drag on the economy. It might well cause explosive economic growth in 2018.