US President's ace in the hole in a trade war: A strong economy

NEW YORK • 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. It is also less exposed to the fallout from an escalating trade war since it does not rely on exports as much as other countries.

All of this gives Mr Trump leverage with world leaders, potentially forcing them to make concessions.

But his threats could also backfire. Economists warn that the US 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 Mr 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."

TRADE SHOCK

If you have the strongest economy in years, then the trade shock appears manageable... 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.

MR GREGORY DACO, head of US economics at Oxford Economics.

Next month, 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 behind 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.

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 build-up 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.

Taken together, these factors have compelled economists to revise the economy's tempo upwards.

But the good news may not last. While Ms Diane Swonk, an economist with Grant Thornton in Chicago , expects a 3 per cent expansion for the full year, she said 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. There are also fears of an expanding trade war, which could see the tariffs hurt the US economy by stoking inflation without increasing wages.

NYTIMES

A version of this article appeared in the print edition of The Straits Times on June 22, 2018, with the headline 'US President's ace in the hole in a trade war: A strong economy'. Print Edition | Subscribe