The airwaves and political channels are filled with self-congratulations on 3.2% annualized growth in the first quarter of 2019. This is touted by Trump administration officials as “proof” that the 2018 tax cuts worked and we have now returned to the days of 3%-plus self-sustaining growth. Don’t believe it.
Growth in Trump’s first year (2017) was identical to the eight years of the Obama administration, about 2.3%. Growth was slightly better in 2018, but this appears to be a one-time Trump bump due to the tax cuts. That’s fine, but it’s not self-sustaining.
The first-quarter 2019 figures were propped up by a number of temporary factors including inventory accumulation, government spending on highways and improvement in trade. The inventory accumulation and trade improvement were both related to the trade wars and were an effort to beat the tariffs that are now being imposed. With that behind us, what’s the outlook for the rest of 2019?
As of today, the best forecast for growth in the second quarter of 2019 from the Atlanta Fed is only 1.2%. If that figure holds, first-half growth annualized would be 2.15%, about where it has been for the past 10 years. In other words, there is no growth miracle, just more of the same.
Given adverse demographics, persistent disinflation and flat productivity, why do we have any growth at all? This article gives a simple answer to that question: debt. Jeffrey Gundlach, the new “Bond King,” says, “Nominal GDP growth over the past five years would have been negative if U.S. public debt had not increased.”
If growth is unsustainable without debt, how sustainable is the increase in debt? The answer is that any debt that grows faster than income will eventually result in default through inflation, restructuring or nonpayment. The timing is uncertain, but the outcome is not. Investors can prepare for the inevitable for now by increasing allocations to cash and gold.
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