Economist on Trump's new GDP prediction: 'More wishful thinking'

Finance Writer
Yahoo Finance

President Donald Trump’s prediction that U.S. economic growth could top 5% in the next quarter is “more wishful thinking” on his part, according to MUFG Union Bank Managing Director and Chief Financial Economist Chris Rupkey.

“All Presidents are leaders who often bend the truth a little in order to encourage better outcomes for the people and for the economy,” Rupkey told Yahoo Finance in an email.

“I would treat the 5% GDP growth forecast as a hope on Trump’s part that all the policy changes, tax cuts, deregulation, better trade deals, will bring about a better tomorrow. More wishful thinking on Trump’s part, something to work towards, rather than a hard forecast.”

US President Donald Trump gestures as he speaks during a dinner with business leaders in Bedminster, New Jersey, on August 7, 2018. (Photo: BRENDAN SMIALOWSKI/AFP/Getty Images)
US President Donald Trump gestures as he speaks during a dinner with business leaders in Bedminster, New Jersey, on August 7, 2018. (Photo: BRENDAN SMIALOWSKI/AFP/Getty Images)

Trump made the remarks during a dinner with business leaders on Wednesday night.

“We anticipate this next quarter to be, this is just an estimate, but already they’re saying it could be in the fives,” Trump told a gathering of top executives at his golf resort in Bedminster, New Jersey.

In the second quarter of 2018, the U.S. economy grew at an annualized rate of 4.1%, almost double the 2.2% growth rate that started the year.

The challenge with achieving high numbers like 5% is that there is relatively little slack in the economy to that can be tapped on for economic growth. With wages flat, tax rates going down, and a trade war threatening to affect our trade balance, high rates of GDP could to be unsustainable.

“As an economist, it is difficult to forecast another repeat of last quarter’s 4.1% rise in real GDP, let alone 5% growth in the third quarter,” said Rupkey. “The trade war uncertainty [and] the actual certainty of tariffs being put in place are really going to take a toll on growth at some point. The economy was already showing signs of its age as year 10 of the expansion began in July.”

In the second quarter, economic growth hit its fastest pace of growth since the third quarter of 2014. (Source: BEA)
In the second quarter, economic growth hit its fastest pace of growth since the third quarter of 2014. (Source: BEA)

Rupkey added: “Everyone has already bought a car in this economic cycle, and business has ordered all the equipment they need to meet the demand for the goods and services they provide their customers. The economy is running out of workers to hire as we have achieved full employment. There are many reasons to think growth will settle back down to 2 percent something sooner rather than later.”

Trade war could ‘kill the golden goose’

Yahoo Finance Editor-In-Chief Andy Serwer noted that even if the number could be achieved — the trade war could kill it.

“It’s possible … record unemployment, longest economic expansion in history, longest bull market in history, not the highest GDP growth in recent history but getting up there,” Serwer said on Midday Movers. He added that five percent GDP “would be getting very close to some of the highest growth we’ve had in modern U.S. history. All systems are go, so I think it’s possible.”

US President Donald Trump (C) speaks, flanked by First Lady Melania Trump (2nd L), Boeing CEO Dennis Muilenburg (L), CEO of PepsiCo Indra Nooyi (3rd L) and his Special Advisor and daughter Ivanka Trump (R), during a dinner with business leaders in Bedminster, New Jersey, on August 7, 2018. (Photo: BRENDAN SMIALOWSKI/AFP/Getty Images)
US President Donald Trump (C) speaks, flanked by First Lady Melania Trump (2nd L), Boeing CEO Dennis Muilenburg (L), CEO of PepsiCo Indra Nooyi (3rd L) and his Special Advisor and daughter Ivanka Trump (R), during a dinner with business leaders in Bedminster, New Jersey, on August 7, 2018. (Photo: BRENDAN SMIALOWSKI/AFP/Getty Images)

However, Serwer noted, impacts of the trade war could “kill the golden goose. … Is this going to be the undoing of all the good times and good tidings that we’re seeing right now?”

In the end, given Trump’s penchant for “truthful hyperbole,” the comments should be taken with a large grain of salt — especially with midterm elections coming up.

“The President is playing to the voters in the midterm elections I think with this pie-in-the-sky 5% growth forecast,” Rupkey said. “It is very difficult to see 5% becoming a reality, not with the demographic headwinds of the baby boom retirements coming. A graying society spends less.”

Follow Aarthi on Twitter.

What to Read Next