The US government on Friday will release its report on how much the American economy grew in the third quarter. The number will have ramifications for business, investment and, of course, politics.
With the midterm elections less than two weeks away, the big question isn’t whether the number will be good — it’s whether it will be good enough to match the expectations set by President Donald Trump.
The President has touted the second quarter’s whopper growth number: 4.2%, the highest since 2014.
Most economists think the third quarter’s figure won’t be that high, as the rush of energy generated by the tax cuts and government spending starts wearing off.
Currently, forecasts range from a low of 2.13% from the Federal Reserve Bank of New York to a high of 3.9% from the Atlanta Fed. A survey of economists conducted by Refinitiv fell in between the two at 3.3%. That would still be significantly higher than the 2.3% average over the 37 quarters of the latest economic expansion.
The President has campaigned on his stewardship of the economy, and has appeared to focus blame for any slowdown to interest rate increases by the Federal Reserve.
Yet most forecasters see growth naturally declining to levels more consistent with America’s aging workforce and sluggish productivity.
“We’ll drift back down to the two percent range, which I think is consistent with the longer term dynamics of the economy,” says Robert Murphy, an associate professor economics at Boston College who served as a senior economist on former President Bill Clinton’s Council of Economic Advisers.
Strong growth over the past year hasn’t been just a function of fiscal stimulus. Consumer sentiment is spiking, and household interest payments, as a percentage of disposable income, are the lowest on record. Business investment in new buildings, equipment and research has picked up after an energy-related dip in 2015 and 2016. Exports surged in the second quarter, which was partly prompted by fear of retaliation to Trump tariffs on China.
Paychecks have even started to grow more quickly, with a 3.3% annualized increase in usual weekly earnings in the third quarter, enough to beat inflation. That’s been a long time coming, given an unemployment rate that in September sank to a nearly 50-year low.
The Fed has been treading carefully as the labor market has tightened, trying to bring interest rates back to a neutral level without upsetting markets or slamming the brakes on growth, even in the face of the near-constant criticism from Trump.
But there are still dangers on the horizon.
The Federal Reserve’s Beige Book, a quarterly survey of business conditions across the county released Wednesday, contained warning signs of rising inflation pressure.
Companies in many regions said they were struggling to find enough workers to fill available jobs. Businesses also face escalating costs for raw materials like steel and aluminum, which they attributed to tariffs as well as high gas prices.
IHS Markit’s monthly purchasing manager’s index, which also surveys a broad range of businesses and is seen as a good indication of where the economy is heading, recorded strong optimism in October. But it also confirmed a sharp rise in the cost of labor, raw materials and other business “inputs” — costs that are being passed on to consumers.
The housing market has become another soft spot, as rising mortgage rates have stalled new home sales, which fell 5.5% in September to their lowest point in a year.
Meanwhile, global growth has drooped. Earlier this month the International Monetary Fund downgraded its forecast for 2018 from 3.9% to 3.7%, warning of the danger of a severe trade slowdown if current retaliatory measures snowball.
In the United States, the manufacturing sector has been rattled by a string of worse-than-expected earnings reports from industrial companies like Caterpillar (CAT), which depends heavily on the decelerating Chinese market. “US manufacturers no longer appear immune to the global growth and tariff concerns,” wrote Goldman Sachs analysts in a note on Wednesday.
And this time, if the economy stumbles, there’s little government cushion to fall back on.
Murphy drew a parallel to his time as a senior economist in the Clinton administration, when unemployment was nearly as low and the economy had been expanding for nearly a decade. But at that time, the federal government was racking up budget surpluses. Now, tax cuts have propelled the deficit well above historical norms, as a percentage of gross domestic product.
“In a situation where you’ve got an economy at full employment, we’re hitting on all cylinders, this is a time when you should see the budget deficit coming down,” Murphy says. “My fear is that down the road, we won’t have the fiscal tools to use.”