Over the past two weeks, a new piece of conventional wisdom has taken hold in the media and the White House that the economy is strong again and concerns over growth earlier this year were unfounded. Indeed, Trump likely ordered a significant escalation of his trade war with China based upon his perception that the economy was doing well enough to handle it. The problem, of course, is that this narrative doesn’t really appear to be true. It is largely based upon two economic reports whose headlines were very strong but whose underlying data revealed continued weakness in the economy.
First, the unemployment rate in April hit its lowest level in five decades. While this headline sounds extremely positive, the reason unemployment fell was because 490,000 workers left the labor force after being unable to find jobs. According to the Census Bureau survey that the unemployment rate is derived from, total employment in April actually fell by over 100,000, and 300,000 fewer people have jobs today than they did in December 2018.
Second, real GDP rose by 3.2% in the first quarter, far above market estimates in the low twos. Again, the report appears to be very strong, but the underlying data is actually poor. GDP rose significantly because of temporary, one-time boosts from inventories and net exports. The problem is that because these factors were very strong in Q1, they will actually subtract from growth in the rest of the year as firms reduce their inventory levels to deal with slowing demand and net exports fall after they had a large, one-time build-up ahead of the expected imposition of tariffs in March. Meanwhile, the core elements of growth that will affect GDP over the rest of the year, consumer spending and business investment, actually fell to their lowest levels since 2013 in Q1, meaning that growth will likely be around 2% or worse for the rest of the year.
Furthermore, closely-watched reports covering US manufacturing and services production saw major declines in April, consistent with the underlying data in the jobs and GDP reports. Last month, US manufacturing output declined to its lowest level since October 2016 and services production fell to its lowest level since August 2017, while the employment gauges in both reports were near their lowest levels of the past 2 years.
Rather than marking an unexpected uptick in the economy, data over the past month has only confirmed that economic activity continues to slow, as Trump’s trade policy harms US manufacturers and farmers and his tax cut fails to provide the sustainable lift to investment that was promised. All of this makes his threats of additional tariffs against China more economically and politically risky, and we will continue to oppose these policies in the days ahead.