U.S. Economy Slows: Trump's 3% Growth Pledge Now In Rearview Mirror

Jul 26, 2019
Originally published on July 27, 2019 12:53 pm

Updated at 10:59 a.m. ET

U.S. economic growth fell to a 2.1% annual rate in the second quarter — down from a 3.1% pace in the first three months of 2019, the Commerce Department said. But growth came in slightly stronger than many analysts had expected.

President Trump has targeted a growth rate of 3% or above, citing the Republican tax cuts passed in 2017. But some studies have found that the tax cuts passed have done little to boost growth, in part because most of the benefit went to wealthy people and corporations.

A 5.2% drop in exports — amid economic weakness in Europe and elsewhere as well as the U.S. trade war with China and other countries — contributed to the slowdown.

"Trade policy uncertainty weighs on companies," said Randy Kroszner, a former governor on the Federal Reserve Board. "They have to think about 'do I invest now do I invest later?' "

In addition to weaker exports, the Commerce Department cited a number of other factors for the slowdown, including drops in business investment and investments in commercial and residential real estate. But consumer spending jumped 4.3% in the second quarter and government spending surged 5%.

Friday's gross domestic product report is a key indicator ahead of the Federal Reserve's expected interest rate cut next week.

"Today's data provides more ammunition for those arguing that the Fed should cut interest rates at its next meeting," Josh Bivens, research director at the Economic Policy Institute, said in a statement. "A growth slowdown is clearly happening."

But Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the economy isn't so weak that it needs the Fed to cut rates aggressively.

"This economy is not broken, and it does not need Fed action to fix it," he said in a statement. Shepherdson noted that economic growth averaged 2.6% in the first half of the year, topping the 2.4% average for the previous five years.

"The GDP report shows that the economy is growing pretty solidly," Kroszner said, adding that there "no evidence that we're going off a cliff."

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The economic slowdown comes even as unemployment, at 3.7%, is at near 50-year lows. Over the past three months, employers have added an average of 171,000 jobs each month.

The trade war has taken a toll on manufacturing, and Boeing's ongoing problems with the grounding of its top-selling 737 Max have also hurt the economy, analysts say.

"We're already seeing some signs of slowing momentum in the U.S. economy and slowing business investment overall," Greg Daco, chief U.S. economist at Oxford Economics, told NPR's Jim Zarroli this week. Daco said Boeing's troubles probably shaved about 0.1 of a percentage point off U.S. growth during the second quarter.

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SCOTT SIMON, HOST:

The U.S. economy is slowing. The Commerce Department says the annual rate of growth went from about 3% last year into about 2% in recent months. Most analysts do not predict calamity, but many do see a trend of slower growth. And that's different from the Trump administration's promise of economic boom times. NPR's Chris Arnold reports.

CHRIS ARNOLD, BYLINE: Part of what appears to be happening is that those Republican tax cuts from a year and a half ago, if they were giving the economy a boost, that's wearing off. That wasn't what was supposed to happen, according to President Trump. Here he is talking before boarding an aircraft back in 2017 when he was pushing for those tax cuts.

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PRESIDENT DONALD TRUMP: The economy now has hit 3%. Nobody thought it would be anywhere close. I think we can go to four, five and maybe even 6% ultimately. Each percentage point is two and a half trillion dollars. We are back. We're really going to start to rock.

ARNOLD: Each percentage point of GDP growth is actually way less than that. That number isn't right. But the promise was clear.

BETSEY STEVENSON: What Donald Trump was talking about there is he believed that the tax cuts would unleash unprecedented investment by businesses that would set forth a stream of growth well into the future.

ARNOLD: That's Betsey Stevenson, a University of Michigan economist who was an adviser in the Obama White House. She says this wave of business investment sparking a new era of remarkable growth, that didn't happen. And in this latest report, spending by businesses actually was particularly weak.

STEVENSON: And that's where the tax cuts have been really disappointing.

ARNOLD: Now, in 2018, the economy did manage about 3% growth. That was better than most of the prior decade, which averaged closer to around 2%. But now, many economists say the trend is heading back down, and they're predicting a return to that more ho-hum rate of growth. Now, 2% versus 3% growth, is that even such a big deal?

STEVENSON: Two to 3%, that sounds like, oh, that's just small.

ARNOLD: Stevenson says, though, it's actually a huge difference. Three percent growth is 50% faster than 2% growth, right?

STEVENSON: Fifty percent faster growth.

ARNOLD: I see. So it's like, you know, driving down the freeway at 40 miles an hour or driving at 60. You're getting where you're going a lot quicker.

STEVENSON: Yeah, that's a great analogy. If you look back over 10 years, you're going to be in a very different place if we were growing at 3% than if we were growing at 2%.

ARNOLD: Meaning more money flowing into businesses, which could lift wages, standard of living. But again, that burst of 3% growth appears to be fizzling. Still, all this is not to say that the economy is terrible. In fact, most analysts agree that these latest GDP numbers were reassuring, given all the headwinds - slower growth in Europe, trade fights and tariffs. Randy Kroszner is a former governor of the Federal Reserve Board.

RANDY KROSZNER: The GDP report shows that the U.S. economy is growing pretty solidly. There have been lots of concerns that we're about to go off the cliff. No evidence that we're going off the cliff.

ARNOLD: Consumer spending was strong. And even if we are returning to slower growth, Betsey Stevenson says what most people probably care most about is their jobs.

STEVENSON: The labor market is still really strong. Unemployment is low and has been low for a long time. We're starting to see some wage gains. And what's clear is it's a really good time for workers to be finding a job, asking for a raise.

ARNOLD: For his part, President Trump tweeted out, quote, "USA set to zoom." That's probably not the word most economists would use, but the economy appears at least to be in pretty good shape. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.