The U.S. gross domestic product grew at an annualized rate of 3.2% in the first quarter of this year, well above the 2.5% widely expected, the highest GDP growth in the first quarter since 2015, according to new data from the U.S. Commerce Department. This beyond-expected performance has also heated up the discussion about "what the American economy really is like." Until this point, there have been many assertions that the benefits from the change in tax rates were about to dissipate and that the "Trump boom" was ending.
All four major factors – personal consumption expenditures, domestic private investment, import and export of goods and services, and government spending and investment – were conducive to the growth of the United States economy in the first quarter. Personal consumption expenditures account for about 70% of the U.S. GDP. The U.S. economy is unlikely to grow strongly if there is a problem with consumption expenditures. Overall, U.S. personal consumption expenditures grew steadily in the first quarter and laid a solid foundation for U.S. GDP growth in the first quarter. The U.S. stock market recovered strongly in the first quarter of this year after a plunge in the fourth quarter of last year. Backed by the wealth effect of the stock market, American consumers have the motility and confidence to consume. In personal consumption, the growth rate of housing and health care consumption is higher. However, if we consider the proportion of personal consumption in the GDP, its contribution to the growth rate of the GDP in the first quarter was not really prominent, and can even be said to be mediocre.
The last three factors are chiefly driving to the U.S. economy’s strong growth in the first quarter. Among domestic private investment, spending on intellectual property has the highest growth rate. In government spending and investment, the federal government’s defense spending [and] state and local government construction spending growth was also more prominent. However, the biggest source of U.S. growth in the first quarter was a reduction in the U.S. foreign trade deficit. This factor accounted for about 30% of the total growth rate of 3.2%. It is fair to say that without this factor, the U.S. economy's performance in the first quarter would have been very modest, far from being very bright.
Based on an in-depth analysis of U.S. economic growth in the first quarter, due to the key impact of the trade deficit reduction, it should be said that the 3.2% growth rate indeed went beyond expectations. If other factors remain the same, if the Trump administration can really sign trade agreements with other economies such as China, Europe and Japan in the form of unilateralism and protectionism this year [and] continue to increase its exports and reduce its foreign trade deficit, the growth rate of the U.S. GDP will continue to get strong support from the improvement in net exports. However, if the U.S. cannot reduce its foreign trade deficit significantly in the second and subsequent quarters and is dragged down by this, the acceleration of GDP growth will decrease this year.
Another major positive factor contributing to the continuing growth of the U.S. economy is the Federal Reserve’s monetary policy adjustment this year. According to the original forecast, the Fed was expected to raise interest rates about three times this year. However, due to pressure from the Trump administration and concerns about the slowdown of U.S. economic growth, the Fed’s monetary policy has undergone a more obvious shift, and the number of interest rate hikes will decrease substantially; the rate may even remain the same. Changes in monetary policy will inject stabilizers and even boosters into U.S. GDP growth.
In fact, since Donald Trump became president of the United States, the U.S. economy has been increasingly affected by policy changes. The adoption of tax policies that granted large tax reductions, the deregulation policy adjustments regarding governmental oversight and approval, the progress of protective trade policies characterized by external pressure, the implementation of an industrial policy whose goal is targeting the return of manufacturing to the U.S., a monetary policy which is opposed to the Fed's raising the interest rate − all of these policy changes reflect the efforts of the Trump administration to drive economic growth through policy change. These policies are intended to make up the chief part of the so-called Trump economic policy. If Trump’s economic policies continue to be implemented, the U.S. economy would most likely continue to maintain moderate or even strong growth.
The Trump administration’s economic policy adjustments will have an impact on economic development, which will be effective for a certain period of time and may contribute to the U.S. economy in the short term. However, it must be pointed out that the changes to fundamental U.S. economic policy are the final decisive factor. Among them, we need to pay special attention to the two indicators of labor productivity and the rate of labor participation. With respect to labor productivity, its acceleration has been sluggish in the past several years, continuously lower than 1.3%, which is much lower than it was in the 1990s, and which occurred prior to the financial crisis of this century. This indicator clearly shows that the U.S. economy still lacks the support that progress in technology and improvement in efficiency provide. With respect to the labor participation rate, this indicator has remained at 63% in recent years, the lowest level in nearly 30 years. This shows that the U.S. economy has not really provided more employment opportunity for the American people in the past couple of years.
The U.S. economy is an important component of the global economy, and its development will have a major impact on other economies, including China. It would be a blessing for the world economy if the U.S. could achieve stable economic growth through domestic structural reforms and technological advances, rather than seeking unilateral short-term benefits by causing harm to other countries and global interests.
The author is deputy director of the American Research Center at Fudan University.