Modest US economic growth contradicts Trump’s ‘roaring geyser’

According to United States President Donald Trump, the US economy was in “a rather dismal state” until he and his administration turned it into a “roaring geyser of opportunity” – how he described it to an audience at last week’s World Economic Forum in Davos, Switzerland.

But US government figures released on Thursday belie the geyser narrative by confirming that the US economic growth in 2019 was the weakest in three years, and once again fell well short the president’s often touted three percent growth target.

US gross domestic product (GDP) – which measures the value of all goods and services produced across the economy – grew at an annualised rate of 2.1 percent in the fourth quarter, bringing full-year growth for 2019 to 2.3 percent, the US Department of Commerce said on Thursday.

President Trump had predicted that the economy would grow by three percent or more thanks largely to a $1.5 trillion dollar tax cut package that his fellow Republicans pushed through Congress in 2017.

But the tax cuts have failed to deliver on that promise. Corporations, which saw their tax rate slashed from 35 percent to 21 percent, ploughed a lot of those savings into buying back their own stock, rather than sinking it into growth-boosting measures such as expanding their businesses or investing in research and development to spur innovation.

Meanwhile, a tax cut translates into less revenue for the US government, which continues to spend more than it takes in annually (so-called “deficit” spending). Earlier this week, the US Congressional Budget Office said the US federal deficit will reach $1 trillion this year and hit $1.3 trillion every year after through 2030.

While deficit spending can be useful when the economy is stuck in a recession and needs a kick-start, too much deficit spending can slow growth. As the national debt rises – and it’s already an eye-watering $23 trillion and counting – the interest payments on that debt rise too, which leaves less money available to spend on programmes that benefit the nation’s citizens.

Strength and disappointment

The Commerce Department data revealed that fourth-quarter US economic growth was buoyed by home purchases that were encouraged by lower borrowing costs – the US Federal Reserve cut interest rates three times last year – as well as US defence spending and a decrease in imports.

But consumer spending – the engine of the US economy, accounting for roughly two-thirds of US economic growth – decelerated in the fourth quarter.

Another potentially worrying trend: business investment declined for a third straight quarter, the longest stretch since 2009. That could ripple through the economy by weighing on job growth and consumer spending.

But some analysts see reason for better growth ahead.

The trade war between the US and China has injected uncertainty into the business outlook and stoked fears of recession. But the signing of the phase one trade deal between Washington and Beijing this month has helped ease concerns.

“The 2.1% annualised gain in fourth-quarter GDP was not quite as solid as it looked, with consumption growth slowing and business investment contracting for a third consecutive quarter,” Capital Economics chief US economist Paul Ashworth wrote in a note to clients. “Nevertheless, with the survey evidence beginning to improve slightly, and the Phase One trade deal easing one of the headwinds holding back investment, we expect GDP growth to gradually accelerate this year.”

The US labour market has also remained on track, creating more than enough jobs to aborb new entrants into the labour force each month. And unemployment is still hovering near a half-century low.

The US Federal Reserve cited low unemployment and the “strong” US jobs market when voted to leave interest rates unchanged at the end of its first policy meeting of the year on Wednesday.