That blockbuster GDP report

That blockbuster GDP report

The Commerce Department finally got around to releasing GDP figures for last quarter. It was a surprising 4.3% easily eclipsing the consensus prediction of 3.2%. Naturally, the White House was ecstatic – and who could blame them. The White House deputy press secretary Kush Desai said “Today’s blockbuster, expectation-smashing GDP report is the latest proof that President Trump’s America First trade and economic agenda continue to turn the page on the Biden economic disaster: American consumers are spending and American exports are surging. President Trump built the greatest economy in the world in his first term and he’s in the process of doing it all over again.” The president tweeted excitedly “The TARIFFS are responsible for the GREAT USA Economic Numbers JUST ANNOUNCED…AND THEY WILL ONLY GET BETTER! Also, NO INFLATION & GREAT NATIONAL SECURITY. Pray for the U.S. Supreme Court!!!”

Well that is really great news – if it is true. After firing all the number crunchers at Commerce and putting his own people in place, it is interesting that I have not read anything on whether we can trust these numbers. A GDP a bit over consensus might not be questioned but a jump of this magnitude deserves a bit of close scrutiny. Moreover, these are the preliminary numbers. I won’t go through all of what I have written before about the lack of reliability of the preliminary numbers which are always revised downward. So let’s just say a wee bit of skepticism is warranted.

The spending numbers indicate robust consumer spending despite almost record low consumer sentiment, growing inflation and increasing layoffs. Are consumers really spending? Yes and no. Most of the spending was due to higher income consumers who may be less price elastic than other consumers. The top ten percent of incomes accounted for virtually all of the increase in household spending during the quarter. This may be due to the continuing rise in the stock market. Also analysts say that the increase in consumer spending may have been driven by consumers spending more in the third quarter before many of the tariffs became effective. But lower income households actually cut back on their spending.

There was an increase in growth due to business investment spending in AI with all the data centers and infrastructure needed. Seventy percent of the growth in GDP was due to AI spending.  Some have called this a “jobless expansion” with unemployment at its highest levels in four years. Will AI spending continue to boost GDP in subsequent quarters? The healthcare sector was particularly strong last quarter and much of the growth could be attributed to a growth in productivity due to AI. Disposable income stayed flat and savings was at its lowest level since 2022. Consumer sentiment actually fell during the quarter. The president tweeted by the absence of inflation measured by the Consumer Price Index which went from 2.6% to 2.8%. However, the Producer Price Index jumped to 3.8 percent indicating higher prices to come. 

Yes I know that the president thinks it is due to his tariffs but their impact has been minimal. Exports did grow while imports fell causing an increase in the GDP numbers by 1.6%. When Trump’s tariffs were announced there was a surge in imports as consumers and businesses sought to buy now at lower prices. The accounting quirk is that this pulled the GDP numbers down since GDP measures domestic production. Nonetheless, the total collected from tariffs was only $195 billion compared to $77 billion before the increase mandated by the president. That’s a difference of only $118 billion which is a long way from being able to send everyone $2,000, eliminate the income tax and make us “rich as hell.”

Manufacturing output did not increase as the president claimed it would but  in fact it has contracted for nine consecutive months.. There has been no noticeable increase in on-shoring due to pressures from the tariffs. The manufacturing sector actually lost 58,000 jobs but it is difficult to untangle whether this is due to AI or to the increased cost of imported inputs. The management purchasing managers index for manufacturing shows the contraction and was 48.2 in November below the 50 mark that separates expansion from contraction. These are not good signs.

I have the feeling that much of the job loss is among small businesses who are less able to absorb the increased costs or to pass them on to their customers. But the continuing impact of deregulation is to increase business investment along with tax reduction. The ying and yang of Trump’s economic policies is to have those factors offset the negative impact of his tariffs.