It’s Not a Trump Boom, It’s an Oil and Gas Boom
(Bloomberg Opinion) -- President Donald Trump has gone so far as to suggest that he possesses “a magic wand” capable of producing unexpectedly robust economic growth. I don’t know about a magic wand. But Trump is right about the strong economy: This is a genuine boom. And the greatest threat to it is the president’s policy agenda.
First, give credit where it is due. The strong economy is not merely a continuation of long-term trends, as the president’s critics contend. Before the election, nonpartisan experts were predicting lackluster growth at best, with one estimate suggesting GDP growth of about 1.75 percent until 2025.
Such predictions made sense. The economy was bound to slow down as the recovery from the Great Recession took hold. Yet the economy has shown no signs of slowing down. Indeed, it is on track to match the president’s promises, contained in the administration’s first budget, of GDP growth of 3 percent and job growth of 10 million over eight years. (Former Treasury Secretary Larry Summers wrote that the budget was about as believable as “tooth fairies and ludicrous supply-side economics.”)
Year-over-year GDP growth has marched upward from 1.3 percent in the second quarter of 2016 to 2.9 percent in the second quarter of 2018, and will almost certainly break 3 percent in the next quarter. Meanwhile, the economy has added more than 3.8 million jobs since Trump took office, a rate which would add up to 18.4 million new jobs over eight years.
When it comes to investment, however, the numbers tell a different story. Dig into the specifics of the boom, and the dangers of Trump’s policies become more clear.
A chart of the government’s most timely indicator of business investment mimics one for the price of oil, which peaked in July 2014, fell sharply throughout 2015, and bottomed out in January 2016:
At first glance, this too might seem to be good news for the White House. Trump ran on the promise of energy dominance and strong support for the oil and gas industry. Since he has become president, the industry is doing quite well.
The explosion of oil and gas production in the Permian Basin has been nothing short of phenomenal, and it has the potential to reshape markets. Increasingly, however, producers have faced difficulty getting their product to market. The source of the bottlenecks is twofold: a shortage of infrastructure — largely oil pipelines — and a shortage of labor.
The cost of steel in a single pipeline can run to the hundreds of millions, and the president’s tariffs have increased that cost. Any further trade restrictions, including quotas or “buy American” provisions, could increase costs significantly, as the some of the high-quality steel needed in construction is not made in America.
Pipelines are billion-dollar projects whose feasibility is sensitive to their 30-year return. Uncertainty in the cost of the construction makes present investment less likely and future shortages more likely.
There is also uncertainty about workers. The oil and gas industry requires laborers who are willing to migrate to remote locations to do physically demanding work. As the labor market tightens, domestic workers are harder to find. This doubly true for the older workers, many with health problems, that are still struggling to come back into the labor force.
These shortages could be alleviated through increased immigration. But the administration shows little interest in allowing more legal immigration even as it cracks down on illegal immigration. This exacerbates labor shortages, especially in border states like Texas.
Taken together, the president’s trade and immigration policies threaten to slow or choke off the investment boom driven by oil and gas exploration. If he’s not careful, his actions could reverse the trends he is so eager to tout.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a senior fellow at the Niskanen Center and founder of the blog Modeled Behavior.
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