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Trump rolls the dice on 3 percent growth

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Trump rolls the dice on 3 percent growth

The Trump administration is forecasting 3 percent growth for the next few years, betting that a slew of policy changes like slashing taxes and regulations will fuel a robust economic expansion.

President Trump has touted his ability to reach lofty economic goals, with officials arguing that his tax cuts, regulatory rollbacks and the infrastructure plan will usher in faster economic growth. 

But economists warn that any bump in growth could be short-lived and fraught with recessionary pressures that will rise heading into the next decade.  

On Tuesday, the White House Council of Economic Advisers (CEA) put out a detailed 568-page analysis of the Trump administration’s economic outlook. It predicts 3 percent growth through 2020, which would be 11 years into the latest expansion.  

“There’s so much momentum in this economy,” said Kevin Hassett, chairman of the CEA, on Thursday.  

“Right now, we’re looking at an economy that’s about as solid and as good as we’ve seen since before the financial crisis,” Hassett said. 

Economists forecast that the tax law, among other factors, will probably provide a healthy boost to the economy that could push up growth to 3 percent — a scenario that could give a lift to the GOP in this year’s midterm elections. 

Gus Faucher, chief economist for the PNC Financial Services Group, said his group is still working on its latest forecast, but said it will bump the growth projection to 3 percent for 2018, up from a 2.7 percent estimate after fourth-quarter 2017 growth numbers were released at the end of January.  

“With the new spending bill raising the caps on discretionary spending, the economy will get support from the federal government,” Faucher said. 

“Consumer spending, business investment and homebuilding will all be positives for growth this year,” he said. 

Keeping up that level of growth beyond this year could prove difficult. It would require sustained growth through 2019 — the recession ended in June 2009 — despite the pressures of burgeoning federal deficits and rising inflation. 

“However, over the next couple of years growth will slow to 2 percent, as the impact from the tax cuts and greater spending will only be temporary,” Faucher said. 

The current economic expansion, which began under the Obama administration, is now the third longest in U.S. history and will probably move up to the second spot in the coming months.

“Three percent growth this year is possible, even likely, given the temporary boost to growth fueled by the deficit-financed tax cuts and government spending increases,” said Mark Zandi, chief economist with Moody’s Analytics.  

“But growth will be substantially slower by 2020, and recession risks high, as the stimulus fades and the economy tries to digest the higher interest rates resulting from the deficit-financed stimulus,” Zandi said.  

Longer-term growth is expected to remain around 2 percent a year, a level the economy would have likely maintained without the added stimulus from the Republican tax law, he said.  

“Although of course we are left with much bigger deficits and larger debt burden.”

The U.S. economy grew at a 2.3 percent pace in 2017, up from 1.5 percent in 2016 and only 0.1 percent shy of the Obama White House’s projection.  

The Federal Reserve, meanwhile, in its most recent analysis in December said that growth this year would settle around 2.5 percent but fall to 2.1 percent in 2019 and 2 percent in 2020. 

At their latest meeting in January, central bankers said “they anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labor market conditions would strengthen further.” 

Most of that upward adjustment is from “information suggesting that the effects of recently enacted tax changes — while still uncertain — might be somewhat larger in the near term than previously thought,” the Fed said in January meeting minutes released on Wednesday. 

While jobs growth has remained steady, the labor market added the fewest since 2012 during Trump’s first year in office.

The economy added 200,000 jobs in January, than expected, and boasted the strongest wage growth since the 2008 recession. Wages increased 2.9 percent in 2017, the best rate since May 2009, as the labor market tightened and states raised their minimum wage levels. 

The unemployment rate has held at 4.1 percent for the past several months, a 17-year low. 

But baby boomers hitting retirement age and Trump’s push for tighter immigration policies are likely to further shrink an already tight labor force, likely making it difficult to achieve faster growth. 

“The administration’s wishful growth forecast far exceeds those from independent sources, such as the Fed, Wall Street firms and international economic agencies,” said Aaron Sojourner, an economist at the University of Minnesota, who recently worked for the CEA under Obama and Trump. 

“Tax changes may boost growth a little, but less than they are promising,” Sojourner said. 

Still, the uptick in business and consumer confidence — spending amounts to nearly 70 percent of the economy — could provide another lift to economic growth, at least for this year.

The Conference Board is forecasting the economy to grow by as much as 2.9 percent in 2018 behind wage growth and higher producer prices, which both signal firming inflation.

Market volatility “reminds business leaders that expansions are not immortal,” the Conference Board said in its Feb. 14 analysis. 

Trump had campaigned on boosting economic growth to a 4 percent to 5 percent pace. Economists roundly dismissed that promise as improbable, even as congressional Republicans praised Trump’s optimism.

Now the Trump administration and GOP Congress have coalesced around bringing economic growth up 3 percent a year, saying their policies can consistently achieve that level of expansion. 

“We, at the CEA, and in this White House, don’t accept that there’s a new normal,” Hassett said Thursday.  

“You can see that there’s a very strong case to be made that we can just go back to normal and stop modifying the word ‘normal’ when we think about the economy.”

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