Last week, the Department of Commerce released a surprisingly strong estimate of 3.2% gross domestic product growth for 2019’s first quarter. President Trump called the news “incredible,” and a better term might have been “almost unbelievable.” But that was not the way his Council of Economic Advisers saw things.
Chairman Kevin Hassett said the number was confirmation of what they expected: Trump’s policies are working. The U.S. economy is on a roll.
But is it once again a “Goldilocks economy,” like it was last fall? Is everything just right again? Or should we still be worried about the three bears?
Remember, Goldilocks was enjoying happy times back in December, but that was before bear one, the Fed, hit the interest rate pedal. Trump bargained for bear two, a government shutdown. Bear three, Europe’s economy, turned south.
For now, the Fed is tamed. Our monetary authorities seem to have moved to a low interest rate preference, the government shutdown is behind us, and Europe is looking slightly better.
But no, it’s still not quite Goldilocks — at least not yet.
Although one should never look a gift horse in the mouth, here’s another take on the unexpectedly high first-quarter estimate: The strong performance was not about consumer spending, which drives 80% of the economy, but rather increases in inventories (merchandise produced but not sold) and state and local investments. Another positive GDP shot came from lower imports, but that may have been due to earlier efforts of U.S. firms to avoid pending China tariffs.
On closer examination, these growth components look more like sand than stone when it comes to enriching our foundation for future growth.
The economy can be thought of as being balanced when businesses together invest just what is needed to keep things rolling. But if inventories, which are part of the investment side of GDP, are rising because of disappointing sales (for example, aircrafts that cannot be shipped and billed and falling demand for autos) then production in the next period will fall to compensate. Next quarter’s growth will be penalized.
If first quarter’s large increase in state and local investment resulted partly from the federal government shutdown, then that effect will prove to be temporary and go away with the evening tide.
Yes, picking at the first quarter GDP growth estimate suggests we will see smaller growth later. Still, our 2.2% growth for 2018’s fourth quarter combined with 3.2% the last quarter yields an average of 2.7%, and that hits pretty close to what many forecasters expect to see for 2019.
The Goldilocks economy may still be off in the distance somewhere, but lower-level U.S. growth still fuels our prosperity and feels good. Inflation is still at a low level, employment is rising, and real wages are improving. It is what it is, and we should celebrate.
Bruce Yandle is a contributor to the Washington Examiner ‘s Beltway Confidential blog. He is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business and Behavioral Science. He developed the “Bootleggers and Baptists” political model.
