April 30, 2018 Patrick Oliver-Kelley

U.S. economic growth cooled last quarter. Consumers pulled back following outsize spending in the prior period, though solid business investment cushioned some of the weakness and employee-compensation costs accelerated amid a tight job market. These results underline the difficulty of achieving Trump’s goal of 3 percent sustained growth, despite corporate and individual tax cuts that went into effect in January. Other figures on Friday cast a shadow over the strong, synchronized global upswing: Europe’s economy lost momentum in the first quarter as expansions slowed from the U.K. to France, partly because winter storms.

Consumer spending, the biggest part of the economy, rose 1.1 percent, matching estimates and marking the smallest gain since 2013. Business-equipment spending and residential investment also slowed. The tax cuts, focused on corporations and the wealthy, kicked in on Jan. 1, and employers adjusted worker paychecks to reflect the lower tax rates in February. But two recent polls have shown a slim majority of Americans said they haven’t notice an increase in take-home pay. The White House has estimated average annual household income would increase $4,000, factoring in economic growth and companies using their tax savings to increase wages. But the nonpartisan Tax Policy Center estimated that the figure would be $1,600 this year — and just $930 for middle-income households. Trump strongly criticized former President Obama for not having a single calendar year in which economic growth hit 3%. In fact, Obama presided over growth of 2.9% in 2015 and three 12-monthly periods during his administration in which growth exceeded 3%.

Trump‘s antediluvian trade policy seems bent on our destruction. He makes threats, strike deals and declares victory. Unfortunately, His mercantilism seems to be gaining steam. Foreigners have duly queued up to sue for peace. Vindication? Far from it. No deal has yet been done with China. The danger of a trans-pacific escalation remains real, partly because of his character. If he wins one fight, he is likelier to start another. His policy seems to be founded on wretched economics and dangerous politics. He is obsessed with our trade deficit which is bilateral. His bluster cannot change basic economic logic: Tariffs bring trade into balance only if they somehow encourage national savings or reduce investment. If America slaps taxes on Chinese goods, China will buy less of them and the deficit will shrink. But, unless Americans change their total spending and saving, China will just buy more from elsewhere.

The president’s fundamental error is to see trade as a zero-sum game. To him, exporting is winning and importing is losing. Gains from trade come from the specialization permitted by the free exchange of goods, capital and know-how. This partially explains why his politics are so irresponsible. Rather than work within the rules-based system of trade, much of which was America’s creation, he bypasses at will. Managed trade is a mistake, not a victory. It substitutes power of political lobbies for market forces, favoring well-organized producers over silent, disparate consumers. His approach threatens to leave everyone much worse off. Yet, global trade has proven itself to be remarkedly resilient.

China has signaled that they are not about to back off. Its steel and aluminum exports to us amounts to less than 0.03% of its GDP, is not even a rounding error. Trump’s request that they cut their trade surplus by $100 B is risible. An investigation of their Intellectual-property practices is almost completed and Xi Ping surely wants to show that he is no pushover. Worryingly, each side thinks that in a trade war of attrition, it would have the advantage. This has all the makings of a lose-lose battle.
Most presidents, after their honeymoon, something happens because all of the things that they are planning to do politically, do not happen overnight.

Consequently, when the honeymoon period is over these presidents have a bear market. The biggest question mark is the impact on markets when investors realize that the federal government’s annual budget deficit is set to rise to more than $1 trillion in 2020, as estimated by the Congressional Budget Office. In a decade, the public debt will almost match the size of the US economy, bigger than at any point since after WW II and well past the level that worries economists.

Trump believes that his new tax law will push economic growth above 3% a year, generating more revenue than the tax cuts cost. But the Budget Office estimates the economy to grow at an average rate of 1.9% over the next ten years.

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