Tom Brenner / The New York Times
Tuesday, March 12, 2019 | 2 a.m.
WASHINGTON — President Donald Trump’s $4.75 trillion budget proposal unveiled Monday brims with confidence that the U.S. economy will continue to expand rapidly, despite recent data suggesting growth is slowing.
Trump told reporters last week that the economy is “very, very strong.” His budget proposal forecasts 3.2 percent growth in 2019, which would be a slight increase from last year and the strongest rate since 2005. It estimates similarly strong growth for the next decade, enough to eventually reverse the expansion of the federal budget deficit under Trump’s watch.
But there are signs, in the indicators Trump watches closely, that his economic policies are beginning to work against his economic goals.
Waning stimulus from Trump’s 2017 tax cut and economic damage from his global trade war are undermining the president’s oft-stated objective of increasing growth and reducing America’s trade and budget deficits.
The Federal Reserve and Congressional Budget Office both expect 2.3 percent growth for the year. A group of economists surveyed monthly by The Wall Street Journal now predicts 2.2 percent growth for the year.
Trump’s tariffs on steel, aluminum and $250 billion worth of Chinese imports are beginning to raise consumer prices, and could push inflation much higher if they are left in place or expanded. That could force the Fed to resume its path of raising interest rates, which Trump has repeatedly criticized as impeding the economy.
The administration’s own budget projections show $1 trillion deficits for the next four years, and no balanced budget for 15 years, even with assumptions of strong economic growth. Trump’s $1.5 trillion tax cuts have driven much of the deficit increase — federal tax collections from businesses and individuals fell 9 percent in January compared with the year before — along with spending increases he signed when Republicans controlled both chambers of Congress.
White House officials insist the tax cuts will eventually pay for themselves through revenue growth. Most economists disagree. And most budget hawks expect Trump to rack up larger deficits than his budget predicts.
Another key metric Trump watches — the trade deficit — is also widening. The gap between the goods America buys from its trading partners and the goods it sells grew to a record high in 2018, despite Trump’s focus on narrowing that deficit.
Few of these developments have surprised economic forecasters, who have long warned that Trump’s economic policy initiatives would undermine his overarching goals.
Trump’s tariffs on steel, aluminum and Chinese imports have hurt U.S. exports, as trading partners imposed retaliatory tariffs and Chinese officials stopped buying key U.S. products like soybeans. Perhaps more consequentially, forecasters say, although the president’s signature tax cuts fueled economic growth last year, they also helped widen the trade and budget deficits.
“The trade deficit and budget deficit are inherently related,” said Diane Swonk, chief economist at Grant Thornton. “When you blow a hole in your budget deficit, you need to rely more on the rest of the world for your borrowing.”
Many economists say fading stimulus from the corporate and individual tax cuts is driving their growth projections below 3 percent for this year. But that, too, is not a surprise.
“The slowdown in growth is in line with our expectations,” said Alexander Arnon, a senior analyst at the Penn Wharton Budget Model at the University of Pennsylvania, which projects 2.2 percent growth this year.
About half the drop-off from 2018, Arnon said, was attributable to the end of the “immediate boost” to the economy from the tax cut package Trump signed in late 2017.
Increased federal borrowing to fund the tax cuts “may account for much or all of the rise in the trade deficit,” Arnon said.
Foreigners purchased up to $100 billion in additional U.S. debt last year, using dollars they got from selling more products to America.
Trump has said little recently about the trade or budget deficits. Like most of his predecessors, he has accentuated positive statistics to promote his stewardship of the economy, including a 3.8 percent unemployment rate and, in data released Friday by the Labor Department, the fastest wage growth in a decade.
Strong growth has buoyed the president’s approval ratings on economic issues. Gallup reported last week that 56 percent of Americans approve of his handling of the economy and 54 percent approve of his handling of unemployment, well above the 43 percent who approve of his performance overall.
Slower growth could threaten those ratings.
Goldman Sachs reduced its forecast for first-quarter growth Monday to just 0.5 percent, after new data showed weakening consumption over the last several months. If that forecast proves correct, the economy would need to average 4.1 percent growth for the next three quarters to reach Trump’s 3.2 percent goal for the year.
Trump and his advisers are confident that growth will speed up this year, because they see tax cuts continuing to increase investment in the economy and entice more Americans, particularly those older than 50, back into the workforce. The chairman of Trump’s Council of Economic Advisers, Kevin Hassett, said growth could be higher than 3.2 percent this year, if Trump completes a trade deal with China that bolsters U.S. exports.
Past White House budgets have often overshot in their predictions for the next year’s growth. Hassett said he was confident that was not the case this year, because his team’s forecasts did not prove overly optimistic in either 2017 or 2018. He said the slowing growth of recent months most likely reflected chronic seasonal factors and temporary damage from the prolonged government shutdown at the start of the year, and would be reversed in the months to come.
“If the data come in different from our projections, we have to explain why and consider a revision to our forecast,” Hassett said. “This year, we don’t see any reason to do that.”
Trump and some of his advisers view the Fed as the biggest obstacle to meeting growth targets this year. The president has, publicly and privately, criticized the Fed for interest rate increases that he warns could chill growth.
The Fed paused its upward march in rates this year, and Chairman Jerome Powell has promised a “patient” approach to future increases. Powell, appearing Sunday on “60 Minutes” on CBS, said that “patient means that we don’t feel any hurry to change our interest rate policy.”
Some of Trump’s confidants want the Fed to go further to increase growth: Stephen Moore, a campaign economic adviser to Trump, is pushing for the Fed to cut interest rates immediately to counteract a decline in commodity prices that followed rate increases at the end of 2018.
“The Fed is sucking the oxygen out of the economy and has created an economically debilitating deflation,” Moore said, citing three consecutive months of declines in the Consumer Price Index — which remains up 1.5 percent from a year ago — and a 10 percent drop in commodity prices since November. He called for the Fed to reverse its September and December rate increases, which would mean cutting interest rates by half a percentage point.
“The one guy who gets this is Trump,” Moore said. “He told me in a meeting last month that the Fed is preventing us from staying on a 3 to 4 percent growth path.”
Powell has shown no indication that the Fed is looking to cut rates.
“We’ve seen a bit of a slowing” in growth, Powell said, “but still to healthy levels in the U.S. economy this year. So the U.S. economy does seem to be favorable. The outlook for the U.S. economy is favorable.”