Here’s why the fundamentals of the economy suggest strong growth could be with us for awhile

I’m as happy as the next guy that the economy grew 4.1 percent in the second quarter. It’s the most important outcome we wanted to see from the tax cut, deregulation, energy boom and other Trump policies designed to get us to this point. We couldn’t have gotten better news – at this point. But even Barack Obama had two quarters above 4.0 percent, and one of them topped 5.0 percent. This kind of growth is only a game-changer if it’s a trend. What reason do we have to think that’s in the offing here?

As it turns out, quite a bit. Not only are we now operating under much more pro-growth policies, but some of the fundamentals of the growth we saw in the second quarter suggest this really could be a sustainable state of affairs:

While some of the growth came from a burst of exports that some analysts warned could be a temporary response to looming trade tariffs, the details of the report suggest underlying strength that could tee up one of the best years in the current expansion, which began in 2009. After stripping out the volatile categories of trade, inventories and government spending, sales to private domestic buyers rose at an annual rate of 4.3%—even better than the overall GDP number. “The outlook for the industrial economy remains solid,” United Parcel Service Inc. Chief Executive David Abney said during a call with investors on Wednesday. Friday’s report makes it highly likely the Federal Reserve will continue gradually raising short-term interest rates to prevent the economy from overheating. Central bank officials have raised rates twice this year, and penciled in two more increases in 2018 and three in 2019.

When consumers have disposable income to spend, and they’re willing and able to spend it, that gives manufacturers the green light to keep producing more goods, and that’s what ultimately gives you more growth. It’s when both the supply side and the demand side are working productively to make productivity a rewarding enterprise. And here’s a note for Keynesians who are always demanding redistribution of wealth on the theory that low-income people will spend all the money you give them: The Trump policies are better because it frees up capital at both ends. The reduced marginal tax rates and doubled personal exemptions gave lower-income people more money to spend. And the freed-up capital made it possible for manufactures to produce the goods people want and need at a more competitive price that they can afford to pay. The bottom line is this: The private sector always does more good with capital than the government does. And if the tax cut doesn’t “pay for itself” it terms of increased federal revenues, who cares? The health of the private sector is more important than the health of government. It’s the people the government is supposed to serve, not the other way around.

Dan Calabrese——Bio and Archives

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