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The Briefing: Strong economic growth – and warning signs

WASHINGTON – The economy moves like a battleship, sailing steadily forward until it hits a storm – or until an explosion makes it sink.

And there's no doubt that the American economy is moving forward faster under President Trump, although there are warning signs that the boom may not last.

The economy grew at a 4.1 percent clip in the second quarter, prompting the president, with characteristic reserve, to claim credit.

"We have accomplished an economic turnaround of HISTORIC proportions!" he tweeted.

Well, not really. Twice during the eight years of Barack Obama's presidency, quarterly economic growth hit 4.6 percent. Once it even hit 5.2 percent.

But the problem under the Obama administration, and for much of the George W. Bush administration before that, was that the economy would charge ahead at a healthy rate and then stall in stormy seas. As a result, the economy hasn't grown at an annual rate of more than 3 percent since 2005.

So can the economy continue to grow at the brisk pace at which it grew in the spring?

Trump thinks so. He said the springtime rally is just the start, speculating that economic growth could even get as high as 6 percent.

Economists doubt that could happen, though, in an economy that's as established as the one in the U.S. More typically, the countries that grow at a rate of 6 percent or above are those like China, which are rapidly moving into the modern world, not mature economies like the U.S.

Instead, the consensus of nonpartisan experts is that second-quarter growth was a one-time blip resulting from the Trump tax cuts, which gave consumers and businesses extra money to spend in the first half of the year.

"Unfortunately, this rapid growth is largely the effect of a one-time sugar high and is not representative of likely growth over the course of the next year, let alone the next decade. Most analysts continue to estimate that real GDP will grow by about 3 percent this year and by 2 percent or less annually over the next decade," the Committee for a Responsible Federal Budget said in an analysis.

What's more, there are concrete reasons to think that the economy will slow rather than accelerate.

First and foremost, economists are largely united in the belief that Trump's trade policy could hurt more than help. His tariffs on imported steel, aluminum and myriad Chinese products – and the retaliatory tariffs other nations have introduced in response – hadn't been in place long enough by the end of June to have a meaningful effect on that quarter's economic growth. But many fear that in the long run, in a trade war, "everybody loses and nobody wins."

We'll take a closer look at Trump's trade policies in Wednesday's Briefing, but heed the warning signs. The tariffs have hit farmers so hard that Trump has responded with a $12 billion aid package. Companies such as Harley-Davidson have said that the tariffs will prompt them to move some manufacturing operations out of the U.S. And locally, the tariffs could stand in the way of Sumitomo North America's plans to expand production at its Town of Tonawanda facility.

Tariffs will likely push up prices just as the nation's low unemployment rate should push up wages, which is why some analysts worry about inflation. Though it drew little notice, consumer prices increased faster in the first half of this year than they have in six and a half years. And with higher prices often come higher interest rates; in fact, Trump even took the unusual step of warning the Federal Reserve not to push rates higher, fearing that could dampen the economy.

And it certainly could. The more consumers have to pay in interest, the less they have to spend.

Speaking of borrowing, that's a worry, too, in two ways.

First, the federal government continues to borrow like there's no tomorrow, thanks to the fact that the federal deficit is on target to nearly double in 2019.

And while it's largely gone unnoticed, there's been a borrowing binge in the private sector, too. If you click on one link in this Briefing, make it this one – Steven Pearlstein's brilliant Washington Post piece explaining how the same sort of junk debt that caused the Great Recession is making a frightening comeback.

Finally, there's the pesky matter of history. Although it feels as if it lasted much longer, the Great Recession ended, and slow growth returned, in June 2009.  So the economic recovery is now in its 10th year, which means its about twice as long as the typical interval between recessions in the past 70 years and the second-longest on record, after the 10-year expansion that ended in 2001. In other words, we're overdue for a recession.

All of this spells trouble for anyone making financial plans based on last week's burst of good economic news.

Happening today

President Trump holds a campaign rally in Tampa…Vice President Pence addresses the National Cybersecurity Summit hosted by the Department of Homeland Security in New York…The Federal Reserve Board's Open Market Committee meets to discuss interest rate policy…The criminal trial of former Trump campaign manager Paul Manafort begins in Alexandria, Va…The Senate Judiciary Committee holds a hearing on "Oversight of Immigration Enforcement and Family Reunification Efforts."

Good reads

Politico tells us that this fall's map of competitive House races is shaping up differently than had been expected thanks to President Trump...At Vox, Ezra Klein dives deep into the demographic changes that are reshaping American politics...The New Republic profiles the latest Trump administration figure that environmentalists love to hate: Interior Secretary Ryan Zinke...Axios says this year's global heat wave is even stunning climate scientists...And the Washington Post profiles Canada's Donald Trump: Ontario Premier Doug Ford.

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