As President Donald Trump continues to argue that the strong economy and stock market offer him leeway to press his aggressive approach, his trade battles could wind up slowing an economy that is among the GOP’s strongest selling points to voters.President Donald Trump is likely to get one of the best headlines of his presidency on Friday with a highly tweetable report expected to show the U.S. economy grew at its fastest rate in years.
But the big number risks becoming fool’s gold.
Economists warn that Trump’s trade war sped up U.S. exports in the second quarter as China and other countries rushed to snap up American soybeans and other products ahead of impending tariffs, lifting growth in ways likely to be reversed in the coming months.
And as Trump continues to argue that the strong economy and stock market offer him leeway to press his aggressive approach, his trade battles could wind up slowing an economy that is among the GOP’s strongest selling points to voters.
“We are going to see a spike in growth in the second quarter that’s in part related to front-loaded soybeans and other exports and that’s going to be paid back in the next quarter,” said Eric Winograd, senior U.S. economist at Alliance-Bernstein.
Speaking at an event in Illinois on Thursday, Trump boasted about "very big numbers" in the coming GDP report. "I don't know what they are but I think they'll be terrific," he said.
Wall Street’s concern over potential trade wars was on display Wednesday as shares spiked on initial reports of a deal between the U.S. and the E.U. to avoid Trump’s threatened 20 percent tariffs on all imported automobiles and auto parts.
When Trump and European Commission President Jean-Claude Juncker emerged into the Rose Garden it turned out they had only agreed to further talks. The threat of auto tariffs remains, though it’s reduced for the moment.
Economists across Wall Street expect the second quarter growth number, out Friday at 8:30 a.m., to be a blockbuster. Estimates range from around 4 percent to well over 5 percent, which could exceed the second quarter of 2014, when the economy grew 5.2 percent, the top rate of President Barack Obama’s tenure.
Even subtracting the impact of increased exports ahead of tariffs, the number is likely to be 3 percent or better following a round of tax cuts and increased federal spending.
But a figure of five percent or better is not likely to be repeated, many analysts say, meaning Trump could face the same thing that happened to Obama, a burst of growth followed by a fizzle.
“Trade and inventories together are contributing around 2.2 percent to headline GDP — nearly half of the growth we are estimating,” Morgan Stanley analysts wrote in a note to clients this week. “We find evidence that the hefty contributions from these two categories is likely a reflection of stockpiling ahead of the implementation of trade tariffs, and so they are likely to subtract from growth in the following quarters.”
Morgan Stanley and other big banks and forecasters suggest the real second quarter growth rate will be closer to 2.5 percent, returning to a good-but-not-great pace in the second half of the year. Next year could be slower as the impact of tax cuts and increased government spending begin to wane and the Federal Reserve continues to hike interest rates.
Things could get worse if tariffs continue to bite U.S. manufacturers and farmers who are already complaining loudly about increased costs and sagging prices for their exports. Concern in the farm belt already led to a proposed $12 billion bailout from the Trump administration.
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