Why 3% GDP growth is unlikely to last

Nicole Sinclair
Markets Correspondent

Friday’s strong third quarter GDP estimate, which marked the second quarter in a row of 3% economic growth, will likely be celebrated by the Trump administration. After all, Treasury Secretary Steven Mnuchin has said tax reform stimulus will help the U.S. economy hit 3% GDP growth over the next decade, allowing tax cuts to pay for themselves. And a recent uptick in growth might make this controversial projection seem more attainable.

The first reading of GDP for the third quarter came in at 3%.

But the back-to-back 3% GDP growth doesn’t change anything about the structural projections longer-term, according to analysts.

This is not structural change in output

“Politicians are going to declare a victory on this. That’s fine and that’s what politicians do,” said Credit Suisse’s Jonathan Golub. “But has this changed long-term trajectory for GDP? No. This is a period of nice, healthy-feeling cyclical growth not yet accompanied by inflation. That’s very different than having a structural change in output.”

The Congressional Budget Office (CBO) and the Federal Reserve both project long-term GDP growth of just under 2%.

Deutsche Bank’s Torsten Sløk explained that while a significant tax package out of DC in the coming weeks could move growth to stay close to 3% in 2018, many questions remain about the sustainability of that growth, especially given that we’re in year eight of a recovery.

“Expansions begin to slow down when they get older. And the historical pattern is also that the longer the expansion lasts the higher is the probability that we will soon get a recession,” he explained.

Meanwhile, Sløk explained that the response from the Federal Reserve to moderate growth amid rising inflation could also put a damper on long-term projections.

“Higher growth is always associated with higher inflation, and if inflation moves faster up toward 2%—as we, the Fed, and the consensus expects—then the Fed will have to raise rates faster to cool down the economy,” Sløk said. “The Fed would like to see 3% GDP growth for the next decade but they just don’t believe it would be possible because such a high level would lead to overheating the economy.”

Breaking down recent trends

Golub added that recent GDP strength in the U.S. emanates not from U.S. policy changes but instead from a turnaround in the Chinese economy, which has in turn fueled a synchronized global recovery. He expects this to continue being the case through the first half of next year, particularly as the effects of the recent hurricanes roll off.

Plus, the annualized GDP growth is lower than the 3% achieved in the most recent two quarters.

As Bloomberg Intelligence’s Carl Riccadonna points out, the second quarter GDP results were solid at 3.1%, but in part reflected a bounce-back from the soft first quarter when the economy grew just 1.2%. And the third quarter’s 3% growth includes some temporary benefits, including storm-related increases in inventories, he added.

“We could potentially get to 3% growth with productivity improvements. It’s just that it hasn’t happened two quarters into this administration,” Riccadonna said. “Nothing’s happened yet.”

 

Nicole Sinclair is markets correspondent at Yahoo Finance

Please also see:
UPS CEO: Thanks to automation, we’re shipping more packages with the same number of people
Marriott CEO: Corporations overstate the impact of tax cuts on business investment
ADP CEO on proxy battle: ‘It’s really about growing the top line’
Gary Cohn: We won’t put conditions on repatriated cash, and we’re fine with stock buybacks
Mick Mulvaney: The size of the debt concerns me

What to read next

By using Yahoo you agree that Yahoo and partners may use Cookies for personalisation and other purposes