The Finance 202: The Trump economy may seem strong. But not that strong.
But economists caution it should come with an all-caps disclaimer.
The president wasn’t dwelling on nuance when he talked up the GDP figure at a Thursday night rally in Granite City, Ill. “You'll have very big numbers announced tomorrow. I don't know what they are. A lot of big predictions,” he said. “Whatever those numbers are, watch for them. Somebody predicted today 5.3. I don't think that's going to happen, 5.3. If it has the 4 in front of it, we're happy. If it has like a 3, but it's a, a 3.8, 3.9, 3.7, we're okay, but these are unthinkable numbers. If I would have used these numbers during the campaign, the fake news back there would have said, 'He's exaggerating.'”
Several independent projections indeed put growth mid-4 percent range for the months of April through June (though many slightly scaled back their estimates Thursday based on last-minute data). That would amount to a massive leap over the 2 percent growth the economy recorded in the first quarter. And if it touches 5.3 percent, as Trump suggested, it would represent the strongest performance since the third quarter of 2003 (though growth came in at 5.2 percent in the third quarter of 2014 — and President Barack Obama presided over eight quarters with growth over 3 percent, including four over 4 percent.)
Yet there’s a reason for the sudden surge in activity, and it isn’t simply the miracle of Trumponomics. A flurry of action by businesses moving to get ahead of the tariffs flying between the United States and its trading partners accounts for a significant portion of the uptick. For example, soybean farmers are seeing an unseasonal surge in demand. That’s because countries that typically rely on exports from Brazil need new suppliers, since China — the world’s leading importer of the crop — is buying up Brazilian soybeans in retaliation for U.S. tariffs. The result has been a roughly $20 billion spike in orders, good for a half-point of GDP alone last quarter, according to Ben Herzon, executive director of U.S. economics at Macroeconomic Advisers.
Elsewhere, economists see evidence that businesses are stockpiling goods as they brace for higher import prices if more tariffs bite. Estimates vary for how much of the total second-quarter growth number will owe to the phenomenon, though several peg it at around 1.5 percent.
A bigger question is whether the economy can sustain that pace. Trump as a candidate promised to unleash 4 percent growth, at least. “And I actually think we can go higher than 4 percent. I think you can go to 5 percent or 6 percent,” he said in an October 2016 presidential debate — a call he repeated late last year. His budget proposals have been more modest but ambitious nevertheless, resting on assumption that the economy will reach 3 percent growth and stay there.
“Three percent growth is what we do as a nation,” White House budget director Mick Mulvaney said at a CNBC event this week. “I don't know why it became orthodoxy to say we can never ever do that again, and anybody who says we can is crazy.”
But tax cuts and a massive government spending bill have supplied an adrenaline dose of stimulus that will start to fade next year. Meanwhile, the Federal Reserve is on course to continue raising interest rates, adding another drag. Ryan Sweet, director of real-time economics for Moody’s Analytics, projects growth will slow to 2.6 percent next year, and more abruptly after that (the Fed sees growth sliding to 2.4 percent next year and 2 percent in 2020). “We'll experience a hangover in 2020,” Sweet says. “We’re not forecasting a recession. It’s just the economy will really slow down after a couple years of a sugar high.”
For now, despite all the asterisks surrounding today’s report, economists see fundamental strength in dropping joblessness, rising household wealth and solid consumer spending and business investment. “Even if you take out the flukiness, you’re looking at an economy with solid underlying momentum,” Herzon says.
And the leading threat to Trump’s aim of maximizing growth is his own trade policy. “The truce with Europe was encouraging, but China will be more difficult,” says Jim O’Sullivan, chief U.S. economist at High Frequency Economics. An escalating trade fight, “in the near term, continues to be the biggest downside risk.”
|You are reading The Finance 202, our must-read tipsheet on where Wall Street meets Washington.|
|Not a regular subscriber?|
— Juncker's keep-it-stupid strategy. WSJ's Valentina Pop and Vivian Salama: "When Jean-Claude Juncker arrived at the White House on Wednesday, he had no idea how the meeting with President Donald Trump would end... Once Mr. Juncker entered the Oval Office, it was clear Mr. Trump was in a mood to negotiate, said a senior European Union official who was present...
"Mr. Juncker grabbed the opportunity to argue that both sides need to refrain from further punitive tariffs or they would foolishly harm themselves. 'If you want to be stupid,' he told Mr. Trump, 'I can be stupid, as well.' Backing up his points, Mr. Juncker flipped through more than a dozen colorful cue cards with simplified explainers, the senior EU official said. Each card had at most three figures about a specific topic, such as trade in cars or standards for medical devices. 'We knew this wasn’t an academic seminar,' the EU official said. 'It had to be very simple.'”
EU response mixed. The Post's Quentin Ariès and James McAuley: “European officials are struggling to make sense of what seems a temporary trade war truce between [Trump] and the European Union, following the visit of E.U. leaders to Washington this week. Trump and Jean-Claude Juncker, the president of the European Commission, announced Wednesday that they had agreed to work toward resolving disputes over steel and aluminum tariffs, delay proposed car tariffs and talk about a bilateral trade deal. 'Objectively this a good news, that we avoided so far tariffs on cars,' said a senior E.U. diplomat ... In capitals across Europe, a number of national officials echoed that sentiment, heralding the meeting as having prevented a trade war. German Finance Minister Peter Altmaier, for instance, called it a 'breakthrough.' But others were wary, wondering whether it’s realistic to expect Europe to buy more soybeans from the United States, as Juncker signaled, or to become 'a massive buyer' of U.S. liquefied natural gas, as Trump declared.”
See Lighthizer's exchange with Schatz here:
Sen. @BrianSchatz: "Sir, it just means you don't pick stupid fights.".@USTradeRep Robert Lighthizer: "If your conclusion is that China taking over all of our technology and the future of our children is a stupid fight, then you are right. We should capitulate." pic.twitter.com/eEbb6nY6zj
— CSPAN (@cspan) July 26, 2018
— NAFTA breakthrough in August? Bloomberg News's Jenny Leonard: “Lighthizer said it’s possible Nafta partners will reach a tentative agreement next month to revamp the 24-year-old pact. In congressional testimony Thursday in Washington, Lighthizer said the timetable would meet the Mexican objective of having President Enrique Peña Nieto sign a new North American Free Trade Agreement before he leaves office in December. That’s because U.S. trade law requires a three-month period after a deal is reached before the parties can sign it. In other words, if the three countries don’t strike a deal until September or even later, the incoming Mexican president, Andres Manuel Lopez Obrado, would have to sign off on it after he takes office.”
Commerce Secretary Wilbur Ross bet on it:
Iowa GOP Rep. Rod Blum just said he and Wilbur Ross made a bet on Air Force One that the U.S. would reach a deal with Mexico in the next 90 days. Ross bet him a steak dinner that it would get done. "I fully expect to buy you a steak dinner," Blum says. pic.twitter.com/Hkk5A4vZWC— Christina Wilkie (@christinawilkie) July 26, 2018
Canada cuts both out of talks. Bloomberg's Bryce Baschuk: "Canada’s new Minister of International Trade Jim Carr has invited a dozen trade ministers to meet in October to discuss how to fix the World Trade Organization. But two countries have been left off the list: the U.S. and China... Ottawa has invited the top trade officials from Australia, Brazil, Chile, the European Union, Japan, Kenya, Mexico, New Zealand, Norway, Singapore, South Korea, and Switzerland, he said. [Lighthizer] is aware of the meeting but was not invited, said de Boer. He added that the U.S. has launched several criticisms of the WTO but has yet to offer any proposals to fix it."
China eyes infrastructure boost. Reuters's Kevin Yao: "China plans to put more money into infrastructure projects and ease borrowing curbs on local governments to help soften the blow to the economy from the Sino-U.S. trade war, policy sources told Reuters. China’s trade war with the United States has clouded the outlook for the world’s second-largest economy and roiled financial markets... Chinese leaders have ruled out another round of strong fiscal stimulus, wary of inflaming debt risks... The amount of infrastructure spending this time will depend on how the trade war evolves."
Beijing sends message with Qualcomm decision. WSJ's Dan Strumpf: "By effectively blocking Qualcomm Inc.’s $44 billion acquisition of NXP Semiconductors, Beijing made two points: It showed it has weapons beyond tariffs to use in its trade fight with the U.S., and it checked the advance of a powerful rival in a longer-range battle for tech supremacy. Qualcomm has a commanding position in cutting-edge chip technology, which Beijing has long been seeking to nurture at home. By failing to approve Qualcomm’s purchase of Dutch chip maker NXP—thus killing the deal—Beijing slowed the San Diego-based company’s expansion into new sectors, which could help its own chip companies as they strive to catch up with foreign rivals, analysts say."
Trump flags in the crossfire. Reuters: "The red, white and blue banners for U.S. President Donald Trump’s second-term campaign are ready to ship, emblazoned with the words 'Keep America Great!' But they are made in eastern China and soon could be hit by punitive tariffs of Trump’s own making as he ratchets up a rancorous trade dispute with Beijing... 'It’s closely related,' [manager Yao Yuanyuan] said. 'They are preparing in advance, they are taking advantage of the fact that the tariffs haven’t gone up yet, with lower prices now.'”
— A warning on economic spying. AP's Deb Riechmann: “While Moscow’s efforts to meddle in the 2016 U.S. presidential election are widely known, spy services from China, Russia and Iran, along with their proxy hackers also are hard at work trying to steal trade secrets and proprietary information from the United States, according to a government report released Thursday. 'Foreign economic and industrial espionage against the United States continues to represent a significant threat to America’s prosperity, security and competitive advantage,' the National Counterintelligence and Security Center said. 'China, Russia and Iran stand out as three of the most capable and active cyber actors tied to economic espionage and the potential theft of U.S. trade secrets and proprietary information.' ”
— Cohen: Trump knew about Trump Tower meeting. CNN’s Jim Sciutto, Carl Bernstein and Marshall Cohen: "Michael Cohen, President Donald Trump's former personal attorney, claims that then-candidate Trump knew in advance about the June 2016 meeting in Trump Tower in which Russians were expected to offer his campaign dirt on Hillary Clinton, sources with knowledge tell CNN. Cohen is willing to make that assertion to special counsel Robert Mueller, the sources said. Cohen's claim would contradict repeated denials by Trump, Donald Trump Jr., their lawyers and other administration officials who have said that the President knew nothing about the Trump Tower meeting until he was approached about it by The New York Times in July 2017. Cohen alleges that he was present, along with several others, when Trump was informed of the Russians' offer by Trump Jr. By Cohen's account, Trump approved going ahead with the meeting with the Russians, according to sources."
- “Trump Organization finance chief called to testify before federal grand jury.” The Wall Street Journal's Rebecca Davis O’Brien, Rebecca Ballhaus, Michael Rothfeld and Alexandra Berzon.
- “Mueller examining Trump's tweets in wide-ranging obstruction inquiry.” The New York Times's Michael S. Schmidt and Maggie Haberman.
- “Ryan says he opposes conservatives’ effort to impeach Deputy AG Rod Rosenstein.” The Post's Mike DeBonis and John Wagner.
— Business investment holds. Bloomberg News's Katia Dmitrieva: “Orders placed with U.S. factories for business equipment increased in June for a third straight month, a sign of investment momentum heading into the second half despite corporate concerns over tariffs, Commerce Department figures showed Thursday. ... The latest data signal business investment remains firm even as [Trump] widens a global trade war beyond steel and aluminum and into a growing range of products from China, as well as potential levies on autos.”
— Worries over housing. Bloomberg News's Prashant Gopal and Sho Chandra: “The U.S. housing market — particularly in cutthroat areas like Seattle, Silicon Valley and Austin, Texas — appears to be headed for the broadest slowdown in years. Buyers are getting squeezed by rising mortgage rates and by prices climbing about twice as fast as incomes, and there’s only so far they can stretch. 'This could be the very beginning of a turning point,' said Robert Shiller, a Nobel Prize-winning economist who is famed for warning of the dot-com and housing bubbles, in an interview. He stressed that he isn’t ready to make that call yet.”
— Amazon posts profit. Bloomberg News's Spencer Soper: “Amazon.com Inc. investors have traditionally given it a pass on money-losing quarters and narrow profit margins so long as revenue growth kept surpassing expectations. That dynamic flipped on Thursday, propelling the 24-year-old company into a potentially steadier phase. Amazon reported a record second-quarter profit of $2.53 billion, or $5.07 per share. The Seattle-based company has generated net income of $4.16 billion in the first half of this year, more than the previous seven quarters combined, according to data compiled by Bloomberg. In 2014, Amazon lost $131 million. The results demonstrated that Chief Executive Officer Jeff Bezos and his management team can finesse a massive global enterprise with about $200 billion in annual sales and more than half a million employees. Even though second-quarter sales of $52.9 billion came in slightly below estimates of $53.4 billion, investors remain enthused, focusing instead on soaring profit that came in at more than double analysts’ projections.” (Amazon.com founder and chief executive Jeffrey P. Bezos is the owner of The Post.)
— House targets Chinese investments. Reuters's Ginger Gibson: "The U.S. House of Representatives on Thursday passed a $716 billion defense authorization bill that aims to rein in China’s investments in the United States and prohibits the U.S. government from using technology from major Chinese telecommunications firms. The John S. McCain National Defense Authorization Act, which must also be approved by the Senate, passed the House by a vote of 359-54. While the measure puts controls on U.S. government contracts with ZTE Corp and Huawei Technologies because of national security concerns, the restrictions are far weaker than initially drafted."
— SEC rejects Winklevoss ETF. WSJ's Dave Michaels: "The Securities and Exchange Commission on Thursday rejected a proposal to package bitcoin into an exchange-traded fund, the latest indication that regulators are still uneasy with the volatile and largely unpoliced cryptocurrency market. The commission’s vote affirms an earlier decision in 2017 by the SEC’s staff to deny the proposal, for which Cameron and Tyler Winklevoss first sought approval several years ago. Cryptocurrency traders and exchanges have hoped that an exchange-traded product would make the virtual currency more attractive to Wall Street and retail investors. The SEC’s decision, posted in an order on the regulator’s website, underscores its mistrust of a Wild West-like market where manipulation may drive the asset’s price swings. The annualized volatility of bitcoin in 2017 was about 94%."
Picturing the scale of Facebook's stock collapse on Thursday, via CNBC:
Facebook's $100 billion-plus rout is the biggest loss in stock market history, via @foimbert and Gina Francolla https://t.co/u9BcPf39Je pic.twitter.com/6YytHEEwZ6— Rebecca Ungarino (@ungarino) July 26, 2018
A 2008 New Yorker cartoon from P.C. Vey:
Late-night hosts on the Trump-Cohen tape:
Protesters in Spain attack ride-share car with customers inside:
Can Bose's noise-masking Sleepbuds really help you sleep?