This week, much of the story that the White House likes to tell about its economic record fell apart.
It’s not just that growth appears to have slowed, though it has. On Friday, the Commerce Department reported that the country’s gross domestic product expanded at a middling 2.1 percent annual rate during the the second quarter, down from 3.1 percent over the first three months of 2019. This was only a preliminary estimate, a guesstimate really; the government will gather more data and revise that number in the coming months. But it was clearly worrisome to Donald Trump, who tried in vain to put a glass-half-full spin on the news while also placing blame for any weakness on his nemeses at the Federal Reserve.
Friday’s report also robbed the White House of a favorite talking point. Previously, the government believed that the economy grew by more than 3 percent in 2018, a mark it hadn’t hit in more than a decade. This milestone led Trump (or, really, his press shop) to boast that he had “accomplished an economic turnaround of historic proportions.” He was particularly jazzed that growth hit 4.1 percent for one quarter that year.
It turns out we didn’t reach 3 percent growth after all. In its annual data revisions, which also dropped Friday, the Commerce Department reported that the economy grew by just 2.5 percent or 2.9 percent in 2018, depending on exactly how you measure it. It also turns out that growth never actually hit 4 percent in the second quarter of 2018, which—despite being sort of meaningless—had been a point of pride for Trump. In short, goodbye, bragging rights.
Of course, whether or not our GDP growth rate managed to pass a somewhat arbitrary numerical threshold isn’t all that important in the scheme of things. But Friday’s numbers also dealt a deeper blow to the White House’s narrative about how it has supposedly resuscitated the economy from the doldrums of the late Obama years. Trump and his advisers like to claim that by loosening up regulations and cutting taxes on corporations, the administration unleashed a flood of new business investment that has helped push growth along. Their case has always been fairly flimsy: Much of the growth in business investment over the last couple of years was driven by the oil and gas industry, as frackers ramped up drilling in response to higher prices. Still, there was at least some uptick in business investment outside the fossil fuels sector that they could point to as proof that they were doing something right.
After the Commerce Department’s latest data revisions, that no longer seems to be the case. As Harvard Kennedy School economist and former Obama adviser Jason Furman notes, business investment outside of oil and mining has actually slowed down during the Trump administration. It’s possible the investment would be even weaker were it not for Trump’s tax cuts and deregulatory moves. But on the face of things, there’s really no obvious case to be made that they’ve unleashed a boom in business investment.
In fact, it looks like we might even be heading into a bit of a bust. One major reason why growth slowed so much during the second quarter was that businesses actually cut back on overall investment for the first time since 2016. Somewhat ironically, much of that decline was due to retrenchment by the oil and gas industry, which until recently has been responsible for making Trump’s economic record look much stronger than it really is. Crude prices have had a rocky ride since 2018, and frackers have reduced their spending on new drills and other equipment. The retrenchment has been so severe that Halliburton, the biggest fracking services provider in the country, recently announced that it would lay off 8 percent of its North American workforce. Meanwhile, investment in other industries hasn’t been strong enough to pick up the slack. Donald Trump can’t control the price of oil. But he is responsible for the trade war with China, which has probably put a chill on some corporate spending.
Again, this could just be a blip, and it’s possible that as the data get revised, last quarter’s business investment might start to look stronger. But if it doesn’t, it won’t just be a strike against Trump’s story about the economy. It will also undercut years of conservative, supply-side orthodoxy. After all, when Republicans passed their massive corporate tax cut in 2017, their entire argument rested on the idea that it would lead to a surge in investment that would eventually lead to higher wages. Again, there’s no sign that has taken place. If the economy is reaping any benefit from the tax bill, it doesn’t seem to be strong enough to overcome the headwind of Donald Trump’s other rash decisions. Instead, what really appears to be driving the economy is a combination of consumer spending, perhaps plumped up by the tax cut, and federal deficits. The real story of the Trump economy, it seems, is about the power of stimulus spending—the sort of thing Republicans once claimed to hate.