According to early indications, recent U.S. economic growth was full of beans.
No, seriously. More than half of Americaís soybean exports typically go to China, but Chinese tariffs will shift much of that demand to Brazil, and countries that normally get their soybeans from Brazil have raced to replace them with U.S. beans. The perverse result is that the prospect of tariffs has temporarily led to a remarkably large surge in U.S. exports, which independent estimates suggest will add around 0.6 percentage points to the U.S. economyís growth rate in the second quarter.
Unfortunately, weíll give all that growth back and more in the months ahead. Thanks to the looming trade war, U.S. soybean prices have plummeted, and the farmers of Iowa are facing a rude awakening.
Why am I telling you this story? Partly as a reminder of the unintended consequences of Donald Trumpís trade war, which is going to hurt a lot of people, like Iowa farmers, who supported him in 2016. In fact, it looks as if the trade war is in general going to hurt Trumpís supporters more than his opponents.
Meanwhile, Trumpís trade war will benefit some unexpected parties. Was making Brazil great again part of his agenda?
But mainly I offer the parable of the soybeans as a warning against whatís going to happen later this month, when the advance estimate of second-quarter G.D.P. comes in. The headline number is probably going to look good, possibly over 4 percent growth. If so, Trump will trumpet the news as proof that his economic policies are working ó and some gullible journalists may go along with his claim.
So what you need to know is that (a) quarterly fluctuations in growth are mainly noise, telling you very little about long-term economic prospects, and (b) more fundamental indicators show that Trumpís main policy achievement to date, last yearís tax cut, is basically delivering none of what its backers promised.
About those quarterly growth rates: By historical standards, the economic recovery since the end of the global financial crisis has been remarkably consistent. If you look at job growth you see a steady upward trend, seemingly unaffected by political events. Quarterly G.D.P. growth has, however, fluctuated wildly, with a couple of negative quarters and a high of 5.2 percent in the third quarter of 2014.
The moral is clear: Pay little or no attention to short-term growth wobbles, which can be driven by transitory stuff like the reshuffling of world soybean trade.
But in that case, how can we evaluate Trumpís economic policies? The answer is, by looking at how those policies were supposed to work, and comparing that with whatís actually happening.
Let me damn the 2017 tax cut with some faint praise: While the logic of the Trump trade war is completely muddled ó never mind how itís supposed to work, itís not even clear what itís supposed to achieve ó the drafters of the tax bill did have a theory of the case. The story went like this: Lower taxes on corporations would lead to a huge surge of investment, which would raise productivity, which would eventually be passed on to workers in higher wages.
By the way, the idea that workers would see an immediate benefit was always obvious nonsense, and sure enough, they didnít. In fact, adjusted for inflation, the hourly wages of ordinary workers were slightly lower in May than they were a year earlier.
Anyway, when I say a huge surge in investment, I mean huge. Last year I looked at estimates from the Tax Foundation, the only independent institution (well, supposedly independent, anyway) willing to endorse highly optimistic assessments of the tax cut. Those estimates, it turned out, implied a boost in business investment of around $600 billion a year, or 3 percent of G.D.P.
Nothing like that is happening, and leading indicators of business investment, like orders of capital goods, show no sign of an investment boom ahead. Corporations have gotten a really big tax cut: The tax take on corporate profits has fallen off a cliff since the tax cut was enacted. But theyíre using the extra money for stock buybacks and higher dividends, not investment.
As a result, thereís no reason to believe that the U.S. economyís potential growth ó the rate of growth it can achieve on a sustained basis ó will rise from the 2 percent or less expected by most analysts. The tax cut has been good for stockholders ó about a third of whom are foreigners, by the way. Working Americans, not so much.
So how is the Trump economic policy doing? The tax cut is utterly failing to deliver on its advocatesí promises. Itís early days in the trade war, but the administrationís strategy seems designed to inflict maximum self-harm, and first reports suggest that trade conflict is leading to reduced, not increased, investment.
Against that background, how much should we care about whatever headlines are generated by the next set of growth numbers? Very little, if at all. (To be clear, this statement also applies if the quarterly numbers come in worse than expected.) Short-term growth is noise, signifying nothing.