The US economy keeps chugging along. Does everyone owe Trump an apology?

Sydney Morning Herald

2 days ago

It is true that recession fears have subsided, though not entirely.
In April, JPMorgan gave the United States a 60 per cent chance of falling into recession this year. By May, after Trump paused most tariffs, the bank had revised that to 40 per cent, where it stands today.
But the headline GDP figures are not the full story. And Trump's tariffs – and threats of tariffs – have a lot to do with it.
In the first few months of the year, as Trump began announcing border duties and the world awaited his so-called 'Liberation Day' on April 2, America's imports surged, with businesses and consumers rushing to beat the tariffs.
Imports negatively affect GDP calculations. As such, GDP contracted by 0.5 per cent. In the most recent quarter, imports fell, and GDP returned to 3 per cent – the same strong growth figures the US posted in the middle of last year, under former president Joe Biden. Contrary to Trump's claims, he did not inherit an economic mess from his predecessor, but one of the fastest-growing developed economies in the world post-COVID-19 pandemic.
Federal Reserve chairman Jerome Powell said it was better to focus on the combined growth figures for the first half of the year, to smooth out the volatility, which showed GDP rose at 1.2 per cent – down from an average 2.5 per cent last year.
'The moderation in growth largely reflects a slowdown in consumer spending,' he said on Wednesday.
Business investment in equipment and intangibles was broadly up, he said, while activity in the housing sector remained weak. But generally speaking, the economy was solid, though inflation was still 'somewhat elevated'.
'It seems to me, and to almost the whole committee, that the economy is not performing as though restrictive policy is holding it back inappropriately,' Powell said, explaining the bank's decision to leave interest rates on hold at 4.25 to 4.5 per cent – despite Trump's intense pressure to cut.
Consumer spending rose 1.4 per cent for the quarter, up from 0.5 per cent, even as Trump's new tariffs are raking in tens of billions of dollars in new tax revenue, and amid significant uncertainty about who is footing the bill and how much more there is to come.
'We're going to look back and either say, 'Wow, the economy was super resilient' … or we're going to say, 'Yeah, you could kind of feel it was weakening'.'
Louise Sheiner, Brookings Institution
And consumer sentiment, measured by the long-running University of Michigan survey, has bounced back into the 60s from just above 50 points. An update is due this Friday, US time.
While tariffs have been in place for months and raised tens of billions of additional dollars for US government coffers, the new tariffs, which go into effect in a week, represent the first time since Trump came to power that there has been the semblance of certainty over what the rates will be – at least for now.
Still, the US economy seems to be more robust than the doomsday predictions considered.
So, do the world's economists owe Trump an apology?
Maurice Obstfeld, of the Peterson Institute for International Economics, says it is too soon to decide.
'These behavioural shifts have made GDP data more volatile than usual,' he says. 'Let's wait for the tariffs to settle down at new, predictable levels and see what happens before we shoot the economists.'
Louise Sheiner, an economist at the Brookings Institution, espoused a similar view to The New York Times: 'We're going to look back and either say, 'Wow, the economy was super resilient and these things didn't matter as much as we thought they would', or we're going to say, 'Yeah, you could kind of feel it was weakening'.'
Justin Wolfers, an Australian economics professor at the University of Michigan, and a regular critic of Trump's economic agenda, says there is still a decent chance of the US economy heading south later this year.
'When I was asked in the first half of the year for a forecast of the chances of a recession, I was careful to give a conditional forecast: if they go for the 'Full Trump', then 75 per cent, and if they drop their nonsense, then 25 per cent,' he says.
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'As it happened, he started with the Full Trump, then TACO'd. So perhaps the correct probability is somewhere between 25 and 75 per cent, and probably something like 40 per cent. That still seems right to me.'
The term TACO stands for Trump Always Chickens Out – a popular critique of the president's tendency to make scary announcements, before backtracking or reverting to the norm.
'The idea that a single quarterly reading on a single measure says anything about [the economy being a] miracle or mirage is silly on its face,' Wolfers says.
'The economy isn't as bad as folks forecast, but neither was the actual policy that the White House was telling us we should expect.'
In moments of candour, the Trump administration acknowledges American consumers might pay higher prices for some goods, but it is convinced economic growth will compensate.
Hassett said as much this week, noting real wages had grown, which 'means people have more money in their pockets than the price increases that they've seen'.
Board appointees break ranks
Trump is also desperate to stimulate economic growth with lower interest rates, hence his constant badgering of Jerome 'Too Late' Powell to cut the rate. Despite Trump insisting 'there is no inflation' (it is 2.7 per cent), the majority of the bank's board wants to see more data before it makes a move – although the market expects cuts later this year.
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But for the first time in three decades, two governors dissented from Wednesday's decision. Christopher Waller and Michelle Bowman – both Trump appointees to the board from his first term – voted to cut rates by 0.25 points. Both are considered candidates to replace Powell when his term expires next year.
[In his dissenting reasons, published Friday in the US, Waller said tariffs only caused a one-off increase in prices, which the bank should 'look through', while soft growth meant monetary policy should be 'close to neutral'. The 'wait and see' approach was overly cautious, he said. Bowman said inflation had fallen - excluding tariff-related increases - and noted the slower growth in private domestic final purchases, a leading indicator of consumer spending.]
Arthur Sinodinos, a former Australian ambassador to the US who now works at the Asia Group, says now that Australia's tariff rate has been confirmed at 10 per cent, its main worries will be what impact the tariff regime has on global economic conditions, as well as the US economy.