Donald Trump and Janet Yellen: strong performance in the US and elsewhere raises the prospect of rate rises © FT Montage/Reuters/AFP
The US economy has recorded its fastest six-month stretch of growth in three years despite a devastating series of hurricanes, according to new figures released on Friday that will give the Federal Reserve additional confidence to end its post-crisis monetary stimulus policies.
The 3 per cent annual growth recorded in the third quarter of 2017 came despite predictions of a slowdown by private sector economists who expected the hurricanes that hit Texas and Florida to weigh on the US economy. It followed 3.1 per cent growth in the second quarter, making it the first six-month stretch since 2014 in which US gross domestic product grew more than 3 per cent in consecutive quarters.
The Trump administration quickly seized on the figures as proof that the president’s promise of lower taxes and less regulation was already bringing faster growth, with more to come once a tax cut plan passes the Republican Congress. Donald Trump has promised to deliver 3 per cent growth during his presidency.
The sustained growth “proves that President Trump’s bold agenda is steadily overcoming the dismal economy inherited from the previous administration”, said Wilbur Ross, commerce secretary — though many economists argue the Obama White House handed a strengthening economy over to Mr Trump.
The forecasting-busting results gave additional impetus to US equities and the dollar. The S&P 500 was up 0.8 per cent at lunchtime in New York, partly on the back of strong tech sector earnings. The US currency, already rising in anticipation of a new, more hawkish Fed chair, rose 0.4 per cent against a basket of its peers to its highest level since July.
In a new paper published on Friday, Mr Trump’s Council of Economic Advisers argued a reduction in the US corporate tax rate to 20 per cent, as Mr Trump has advocated, would add 0.5 per cent to the US growth rate in the first year it took effect and just over 3 per cent within five years. The result, the White House argued, pointed to an economy poised to kick into “higher gear” once tax reforms pass Congress.
Republicans in Congress insist passage is still on track for this year, though they remain divided over important and politically-sensitive details of tax reform, including how to treat state and local taxes, pension savings and the impact on the deficit.
Kevin Brady, the Republican chairman of the tax-writing House ways and means committee, said he would be introducing tax legislation next week to begin the first major step in the process.
“Congress now has the best opportunity in a generation to continue this [economic] growth through bold, transformational tax reform,” Mr Brady said, promising “a new era of growth for the American people”.
Friday’s strong growth numbers, which were driven by increases in consumption and investment, also highlight the likelihood of further interest rate hikes ahead by the Fed and the contrasting choices Mr Trump faces as he gets close to announcing a new Fed chair.
The president has praised the current chair, Janet Yellen, as an advocate of low interest rates and signalled he may reappoint her. But he is also said to be considering Jerome Powell, another Federal Reserve board member, and conservative hawk John Taylor for the role.
All would face a potential stand-off with a White House eager to see the US economy run hotter than the Fed might like.
Ian Shepherdson, economist at Pantheon Macroeconomics, said Friday’s upbeat growth data suggested a strong rebound in US jobs growth with a sub-4 per cent unemployment rate “just a matter of months away”. That in turn suggested the Fed was likely to raise its policy rate more aggressively than many expect in the months ahead.
“Nothing drives Fed policy like the unemployment rate, which is why market expectations of just one further hike after December are unrealistic,” he said.