The American economy’s first quarter growth vastly outpaced projections. Economists polled by Dow Jones assumed that GDP would increase by 2.5%, but instead it grew by an impressively larger 3.2%.
This is objectively incredible news for the country, and it’s good news for President Trump. But it’s neither total vindication of his fiscal policy nor evidence that the Federal Reserve should follow his monetary marching orders. And it certainly doesn’t mean that we’re out of the woods just quite yet in terms of the potential for a recession.
The continued effects of the Tax Cuts and Jobs Act and heightened consumer confidence were reflected in increased personal spending, and the longest government shutdown in history shockingly did not harm our economic growth in any lasting way. This growth also came as the rest of the global economy has slowed dramatically. Increased exports and decreased imports, likely a result of decreased global economic growth as well as Trump’s protectionist trade policies, added 1.03 percentage points to our economy. These three factors — tax cuts, consumer confidence, and Trump’s assertion that “America First” economics work — are the ones that Trump can take the most credit for.
But such good economic news falsifies Trump’s repeated assertions that rate hikes from the Fed would kneecap the economy. The Fed has rightly attempted to tighten the money supply and return interest rates to historic averages. Interest rates during times of economic booms in the past half century have been at well above 5%, providing the Fed a mechanism to infuse cash back into the economy if things go south. Well, right now we’re in a boom, and the Fed’s funds rate is but half that. The Fed has largely listened to Trump’s latest demands that they pursue dovish monetary policy, but this growth report is evidence that the Fed’s prior three-year money tightening campaign hasn’t harmed the economy. It’s fully possibly that the Fed may resume raising rates, which will surely incense the president, who’s attempted to back the board with dovish adversaries.
All of this also ignores the asset bubbles still looming within our GDP: student loan debt, housing, and leveraged loans. Student loans are effectively subprime mortgages but for a product that, unlike banks with the housing crisis of the later aughts, the government cannot reclaim as collateral. Housing prices are 11% higher than they were at their peak in 2006, and those burnt by the initial housing crisis are the ones now fueling sales. The housing market is far more stable due to less risky loans, but housing may look artificially hot right now. And there’s no indication that covenant-lite loans, which are essentially the subprime version of packaged corporate debt, will retreat from their current market domination. They currently make up 77% of the corporate loan market and 5% of our GDP.
All in all, this GDP report bodes well for everyone. As with all things in politics, Trump’s defenders will try to attribute all the credit to the president, his detractors will attribute none, and everyone will ignore the threat of asset bubbles. Cautious optimism ought to be maintained, so long as everyone remembers that despite the math in front of us, every historical indicator still suggests we’re overdue for a recession.
