Trump's hope for 3% growth no longer looks so far-fetched

Key Points
  • GDP growth of 3 percent in the second quarter and a new uptick in job gains are providing hope for breakout economic gains.
  • President Donald Trump had predicted his policies would generate growth of 3 to 4 percent, but many economists doubted him.
  • Challenges ahead include low productivity and wage growth as well as demographic trends.
Investors shift focus to economic data

When President Donald Trump predicted that his policies would spur growth of 3 percent or more, a lot of economists didn't take him seriously. They may now.

The latest figures on the economy show that breakout economic growth may not just yet be at hand, but it's certainly within reach. A revision to second-quarter gross domestic product showed a gain of 3 percent, the first period to reach that level since the first quarter of 2015.

In turn, that takes the broader picture to a different level.

"If we achieve sustained 3 percent growth, that means 12 million new jobs and $10 trillion of new economic activity. That's some number," Trump said during a speech Wednesday in Missouri promoting tax reform. "I happen to be one that thinks we can go much higher than 3 percent. There's no reason we shouldn't."

The economy grew at just a 1.5 percent pace during President Barack Obama's two terms that began in 2009 as the Great Recession was ending. His second term in office saw GDP average 2.1 percent a year, but overall Obama presided over the worst recovery since the Great Depression.

Trump's term has begun with gains of 2.1 percent for the first half, but that's likely to accelerate into the second half.

The Atlanta Fed is projecting GDP to jump 3.4 percent in the third quarter, which would put the annual growth average at 2.5 percent heading into the final three months of the year. While fourth-quarter GDP readings have been soft the past three years — 2 percent, 0.5 percent and 1.8 percent, respectively, since 2014 — the year still looks poised to finish above trend.

The upward revision was due to increased consumer spending and business investment, providing yet more ammunition to expectations for better growth. And the GDP revision came the same day that ADP reported private payroll growth of 237,000, the best number since March.

President Donald Trump
Nicholas Kamm | AFP | Getty Images

"It's not just the GDP report. We've had a really steady stream lately, whether it's GDP or ADP or [jobless] claims or retail sales or confidence measures," said Jim Paulsen, chief investment strategist at the Leuthold Group. "That shows up in the Atlanta Fed [projection]. How many times in this entire recovery have we put back-to-back 3-plus-percent quarters together? We've done it, but not a lot."

Indeed, the trend calls into question Wall Street's projections that economic growth this year will be closer to 2 percent; The International Monetary Fund estimates U.S. growth at 2.1 percent for both 2017 and 2018.

In the early part of the year, it looked like those estimates would be correct. GDP increased just 1.2 percent in the first quarter, while job gains slowed through the springtime and wage growth remained mired around the same levels despite an unemployment rate that fell to a 16-year low of 4.3 percent.

Trump's pro-business agenda of lower taxes and increased infrastructure spending has stalled in Congress, though he has been able to enact some regulatory rollbacks through executive orders.

Growth has persisted through the year despite the Washington gridlock, and the stock market has posted a series of record highs. At the same time, coordinated global growth has taken hold for the first time in decades.

"The rest of the world is doing pretty well, too," Paulsen said. "If the stock market goes on to new highs, the story again will be we had all this stuff thrown at it but the data was too good, the foundation of fundamentals was too good again to crack it."

Still, skepticism remains among Wall Street economists.

JPMorgan Chase said it was not altering its growth projections, though it did acknowledge "upside risk" to its forecast for third-quarter gains of 2.25 percent.

There's also worry that Hurricane Harvey could put an even bigger crimp in the U.S., though most economists figure that damage at worst would be a few tenths of a percentage point off GDP.

"The risks right now are kind of balanced because there is the potential for at least a temporary hit from the hurricane," said Gus Faucher, chief economist at PNC. "I'm not reading too much into one quarter of 3 percent growth. We had a boost from investment that may not persist. To me the economy now looks pretty similar to what it looked like before we got the revision."

Left yet to be resolved is when the economy can show some wage growth and crawl out of its meager productivity gains. There's also the continued skills gap that exists for employers trying to find the right workers to fill higher-level jobs, and some basic demographics of an aging workforce.

That could mean Trump will have to focus on getting his agenda through if the economy is ever to achieve consistent, breakout growth.

"Fiscal stimulus would be terrific," said Dan North, chief economist at Euler Hermes North America. "I don't think there's any way we're going to get to 4 percent growth except may one or two particular quarters. You've got trends that are really going to make it difficult."

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