Rollercoaster week raises questions about true state of the US economy

The extraordinary decision to “shoot the messenger” was condemned by Democrats as authoritarian – Soviet in nature, said senator Chuck Schumer. Oren Cass of conservative think tank American Compass, said it made the employment data seem worse than it really was.

It’s also true that the GDP report made the US economy seem better than it really was. Growth jumped back to 3 per cent after a quarter in which the economy actually shrank 0.5 per cent, due to a surge in imports as consumers and businesses rushed to beat the tariffs Trump had promised to impose on April 2.

Federal Reserve chairman Jerome Powell said it was better to focus on the combined growth figures for the first half of the year, to smooth out the volatility, which showed GDP rose at 1.2 per cent – down from an average 2.5 per cent last year.

“The moderation in growth largely reflects a slowdown in consumer spending,” he said on Wednesday.

Business investment in equipment and intangibles was broadly up, he said, while activity in the housing sector remained weak. But generally speaking, the economy was solid, though inflation was still “somewhat elevated”.

“It seems to me, and to almost the whole committee, that the economy is not performing as though restrictive [monetary] policy is holding it back inappropriately,” Powell said, explaining the bank’s decision to leave interest rates on hold at 4.25 to 4.5 per cent – despite Trump’s intense pressure to cut.

Consumer spending rose 1.4 per cent for the quarter, up from 0.5 per cent, even as Trump’s new tariffs rake in tens of billions of dollars in new tax revenue, and amid significant uncertainty about who is footing the bill and how much more there is to come.

And consumer sentiment, measured by the long-running University of Michigan survey, has bounced back into the 60s from a low just above 50 points.

So do the economists owe Trump an apology?

It is true that recession fears have subsided, though not entirely. In April, JPMorgan gave the United States a 60 per cent chance of falling into recession this year. By May, after Trump paused most tariffs, the bank had revised that to 40 per cent, where it stands today.

‘We’re going to look back and either say, “Wow, the economy was super resilient” … or we’re going to say, “Yeah, you could kind of feel it was weakening”.’

Louise Sheiner, Brookings Institution

Justin Wolfers, an Australian economics professor at the University of Michigan, and a regular critic of Trump’s economic agenda, says there is still a decent chance of the US economy heading south later this year.

“When I was asked in the first half of the year for a forecast of the chances of a recession, I was careful to give a conditional forecast: if they go for the ‘Full Trump’, then 75 per cent, and if they drop their nonsense, then 25 per cent,” he says.

“As it happened, he started with the Full Trump, then TACO’d. So perhaps the correct probability is somewhere between 25 and 75 per cent, and probably something like 40 per cent. That still seems right to me.”

The term TACO stands for Trump always chickens out – a popular critique of the president’s tendency to make scary announcements before backtracking or reverting to the norm.

“The idea that a single quarterly reading on a single measure says anything about [the economy being a] miracle or mirage is silly on its face,” Wolfers says.

“The economy isn’t as bad as folks forecast, but neither was the actual policy that the White House was telling us we should expect.”

Trump backed down from some of his more extreme policies, such as the unsustainable 145 per cent tariff on Chinese goods – effectively a trade embargo. But the tariffs signed on Friday, which go into effect in less than a week, represent the highest overall tariff levels since the 1930s.

There remains substantial uncertainty about how that will filter through to the US economy.

“These behavioural shifts have made GDP data more volatile than usual,” says Maurice Obstfeld of the Peterson Institute for International Economics. Let’s wait for the tariffs to settle down at new, predictable levels and see what happens before we shoot the economists.”

Louise Sheiner, an economist at the Brookings Institution, espoused a similar view to The New York Times: “We’re going to look back and either say, ‘Wow, the economy was super resilient and these things didn’t matter as much as we thought they would’, or we’re going to say, ‘Yeah, you could kind of feel it was weakening’.”

In moments of candour, the Trump administration acknowledges American consumers might pay higher prices for some goods, but it is convinced that economic growth will compensate.

Hassett said as much this week, noting real wages had grown, which “means people have more money in their pockets than the price increases that they’ve seen”.

Board appointees break ranks

Trump is also desperate to stimulate economic growth with lower interest rates, hence his constant badgering of Jerome “Too Late” Powell to cut the rate. Despite Trump insisting “there is no inflation” (it is 2.7 per cent), the majority of the bank’s board wants to see more data before it makes a move – although the market expects cuts later this year.

But for the first time in three decades, two governors dissented from Wednesday’s decision. Christopher Waller and Michelle Bowman – both Trump appointees to the board from his first term – voted to cut rates by 0.25 points. Both are considered candidates to replace Powell when his term expires next year.

In his dissenting reasons, published on Friday in the US, Waller said tariffs only caused a one-off increase in prices, which the bank should “look through”, while soft growth meant monetary policy should be “close to neutral”. The “wait and see” approach was overly cautious, he said. Bowman said inflation had fallen – excluding tariff-related increases – and noted the slower growth in private domestic final purchases, a leading indicator of consumer spending.

Arthur Sinodinos, a former Australian ambassador to the US who now works at the Asia Group, says now that Australia’s tariff rate has been confirmed at 10 per cent, its main worries will be what impact the tariff regime has on global economic conditions, as well as the US economy.

“The US economy is still chugging along fairly well, but there are some price pressures starting to emerge,” Sinodinos said after Friday’s tariff announcement. “The impact could be significant globally, or it may not be.”

In other words, that dreaded refrain: it’s too soon to tell.

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