Trump's ace in the hole in trade war: A strong economy

As growth slows in Europe, China, Japan and elsewhere, the US finds itself at the top of the global economy. This gives President Donald Trump leverage with world leaders, potentially forcing them to make concessions.
As growth slows in Europe, China, Japan and elsewhere, the US finds itself at the top of the global economy. This gives President Donald Trump leverage with world leaders, potentially forcing them to make concessions. PHOTO: AFP

NEW YORK (NYTIMES) - The US economy has picked up speed and is now on course to expand this year at the fastest rate in more than a decade. That acceleration gives President Donald Trump a stronger hand as he contemplates more tariffs and takes an increasingly confrontational approach with China, Canada, Mexico and other trading partners.

Economists have raised their growth estimates for the second quarter to an annualised rate of nearly 5 per cent, more than double the pace of the previous period. Some economists say the figure could hit 3 per cent for the full year, a level last reached in 2005.

As growth slows in Europe, China, Japan and elsewhere, the United States finds itself at the top of the global economy. The US is also less exposed to the fallout from an escalating trade war since it does not rely on exports as much as other countries. It all gives Trump leverage with world leaders, potentially forcing them to make concessions.

But his threats could also backfire. Economists warn that the president's clout is limited and that his attacks on the trading system could dampen the outlook not just in other countries but also domestically.

"If you have the strongest economy in years, then the trade shock appears manageable," said Gregory Daco, head of US economics at Oxford Economics. "However, with growth peaking, the trade shock will become more intense. With a global backdrop that is not improving anymore, we have to be careful about the back half of 2018 and 2019."

In July, the recovery will reach the nine-year mark, making it one of the longest in modern history. But for much of that time, the engines of the economy were rarely synchronised. When consumers were spending at a healthy clip in 2015 and 2016, business investment lagged as energy companies scaled back or abandoned projects in response to a sharp drop in oil prices.

All that has changed in recent months. Now, the different parts of the economy appear to be operating as one well-oiled machine. Consumer spending rebounded after a soft start to the year, with retail sales in May rising by a robust 0.8 per cent, double what analysts had forecast.

"We have a very strong economy, and if the trade negotiations are successful, it'll be even stronger," said Kevin Hassett, chairman of the White House Council of Economic Advisers. He added that the president was "impatient to fix broken policies," with trade at the top of the list after last year's tax overhaul and deregulation effort.

The trade deficit, often cited by the White House as a vulnerability, narrowed in April, further bolstering economic activity in the second quarter. Strong April orders for fabricated metal, computers and other goods used in production also helped, as did a buildup in inventory as businesses restocked shelves. Such additions to inventory barely had an impact on growth in the first three months of the year, but could contribute nearly a full percentage point in the second quarter.

Increased government spending is providing added propulsion. The two-year budget deal reached in Congress in February added US$300 billion (S$409 billion) in new government spending that is starting to flow into the economy. "It's something of a sugar high, but it feels good," said Diane Swonk, an economist with Grant Thornton in Chicago.

Taken together, these factors have compelled economists to re-evaluate the economy's tempo. At the beginning of May, Macroeconomic Advisers, a forecasting firm based in St. Louis, estimated growth of 3 per cent in the second quarter. By mid-June, it was putting the figure at 4.5 per cent. The Federal Reserve Bank of Atlanta's GDPNow model is even more upbeat at 4.7 per cent.

But the good news may not last. While Swonk expects a 3 per cent expansion for the full year, she added, "This likely will be the peak growth for this cycle." Contributing to that view is the rise in interest rates as the Federal Reserve gradually withdraws the easy credit that persisted for much of the recovery. "The headwinds are mounting," Swonk said.

And then there are fears of an expanding trade war. The tariffs could hurt the US economy by stoking inflation without increasing wages.