September 4, 2018

The Economic Situation

September 1, 2018
Key materials

With September’s arrival, those seeking to decipher US economic trends are challenged by three daunting puzzles. The Trump administration’s tariff policy is first and chief among them. Will tariffs be extended to European automobiles? One week yes; the next week no. To additional Chinese products? And will there be retaliation? The second is Fed policy: how many interest rate increases and when? The third is foreign and immigration policy. Although these two policy areas may not normally be thought to be central to economic policy, they affect the flow of people and oil. On top of all this, there is uncertainty regarding treaties and alliances that can have a long-term impact on the performance of the US economy. 

Mix and stir these ingredients with rocky relations with North Korea and Russia, and Economic Policy Uncertainty Indices hike up. It may be important to remember that higher policy uncertainty correlates with lower growth in US employment. This may be another way of saying that continued high uncertainty can lead, all else equal, to slower GDP growth. 

In spite of the uncertainty, recent US GDP growth has been moving at a fast clip. When the Commerce Department’s advanced estimate for second-quarter growth arrived showing 4.1 percent, the highest quarterly growth in nearly four years—a level that was adjusted on August 29 to 4.2 percent by Commerce’s second estimate—two things stood out. There was (1) a surge in exports generated by firms getting ahead of pending tariffs and (2) a large increase in consumer spending that compensated for the first quarter’s weakness. But when adjustments are made for these irregularities, there is still strong 3.0 percent growth. Recall that 2017’s real growth was 2.3 percent, and 1Q2018’s pace was set at 2.2 percent. 

The possibility that 3Q2018 growth may continue at a high pace is supported by the Atlanta Fed’s GDPNow project, which, on August 24, estimated 4.6 percent growth for the third quarter.  In any case, data tell us we are enjoying a growth surge, at least for now. Continuation will depend, of course, on many things but fundamentally on growth in the labor force and improvements in labor productivity. 

In this report, I focus first and most extensively on the trade puzzle. I brush against Fed policy and then discuss an element of the immigration puzzle that enables us to draw inferences about wages and even human happiness. The report includes a major state spotlight section by Patrick McLaughlin and Stephen Strosko that focuses on the state of Illinois. I conclude the report with reviews of three books from my reading table. 

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