When the Commerce Department’s first estimate for 2019’s fourth quarter rolled in the door showing 2.1% growth, those hoping to see a return of the 3% “Goldilocks economy”, or one with just the right amount of growth, had to put their prosecco back in the refrigerator. There is plenty to like about this economy, and some of it has been described in this column, but, from all appearances, there will be no 2020 Goldilocks celebrations. We will just have to make the best of a slower situation and, unfortunately, borrow to make up for the lower federal revenues that would help fund our rich spending habits.
The fourth-quarter GDP number matched the third quarter’s 2.1% growth rate and slightly outdid the second quarter’s 2%. That made for the worst three-quarter performance since 2016 and came nowhere near the first quarter’s happier 3.1%. The sound of the Trump administration’s optimistic trumpets says just the reverse: As recently as Jan. 21, at the Davos world economic gathering, President Trump claimed that “the American dream is back bigger, better, and stronger than ever before.”
Make no mistake, the numbers point once again toward a sleepwalking economy. That may not be all that exciting, but it probably keeps us free of a 2020 recession. To get a handle on what zonked Goldilocks, we have to consider the three bears that together made 2019 so unpleasant, this time in hindsight.
Trade wars formed the first and meanest bear. Recall that the Trump administration’s animosity toward freedom in markets first showed up in 2018, when tariffs were slapped on South Korean washing machines and other appliances. Then came tariffs on Canadian timber products and on steel and aluminum.
Tariffs limiting the U.S. importation of foreign goods were not enough. In August 2018, Trump announced that owners and operators of U.S. firms had better prepare to shut down their Chinese operations and return home. Economic uncertainty skyrocketed; plans for new investment in long-life capital were shelved, as indicated later by the fact that actual investment fell.
Then came more tariffs, this time covering a growing array of Chinese and then French and German products. All along, of course, the tariffs inspired tariffs in response. U.S. exports began to suffer and, with that, U.S. manufacturing.
But, alas, there was a second 2019 bear menacing Goldilocks. Foreign policy, especially as it relates to the Middle East, brought uncertainty to world petroleum markets, making it riskier to place bets on crude oil prices. While this bear occasionally roared loudly, its bite was blunted by expanding U.S. crude oil production. As a result, we got the uncertainty but missed the harm that comes when oil prices rise and fall with greater frequency.
The third bear, policy from the Federal Reserve, also haunted the prospects for a 2019 Goldilocks economy. In 2018, the Federal Reserve raised interest rates four times, with hints of more to come. Instead, the Fed reversed its position and delivered two rate cuts in 2019. What had sounded like a grizzly bear instead became a Teddy bear.
In all this, we also have to remember that the U.S. government was shut down for more than a month in early 2019, and this didn’t help bring a happier, healthier economy. Then, there was Brexit and a slowing European economy.
As 2019 economic data began to arrive, we learned that the growth rate for employment peaked in January 2019 and headed south, as did the growth rate in bank lending nationwide. The same pattern, with occasional reversals, was seen in industrial production, manufacturing employment, and, of course, in exports of goods and services.
Still, let’s not write an epitaph for Goldilocks’s tombstone yet. The 2% economy might be slower than we like, but at least it has a strong heartbeat. We have a trade agreement with China that partly reverses some tariff actions, and we have a new United States-Mexico-Canada trade agreement. Thus, it’s possible, though perhaps improbable, that Trump will change his mind and become a stronger champion of economic freedom, even the freedom to trade without asking about the address of those who want to trade with us.
Bruce Yandle is a contributor to the Washington Examiner's Beltway Confidential blog. He is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business and Behavioral Science. He developed the “Bootleggers and Baptists” political model.
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