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28 April 2017
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| U.S. economy (The Total Investment & Insurance Solutions) |
The U.S. economy turned in the weakest performance in three years in the
January-March quarter as consumers sharply slowed their spending. The result
underscores the challenge facing President Donald Trump in achieving his
ambitious economic growth targets.
The gross domestic product, the total output
of goods and services, grew by just 0.7 percent in the first quarter following
a gain of 2.1 percent in the fourth quarter, the Commerce Department reported
Friday.
The slowdown primarily reflected slower consumer
spending, which grew by just 0.3 percent after a 3.5 percent gain in the fourth
quarter. It was the poorest showing in more than seven years.
Economists attributed the sharp slowdown in
consumer spending to shrinking utility bills due to warmer weather, a drop-off
in auto sales and a delay in sending out tax refund checks by the IRS, which
also dampened spending. The Total
Investment & Insurance Solutions
Sal Guatieri, senior economist at BMO Capital
Markets, said he expected consumer and government spending to bounce back,
leading to a much stronger second quarter.
"Still, the report will mark a rough
start to the administration's high hopes of achieving 3 percent or better
growth, not the kind of news it was looking for to cap its first 100 days in
office," Guatieri said in a note to clients. The Total Investment & Insurance Solutions
Averaging the two quarters, they forecast
growth of around 2 percent for the first half of this year. That would be in
line with the mediocre performance of the eight-year economic expansion, when
growth has averaged just 2.1 percent, the poorest showing for any recovery in
the post-World War II period.
Trump repeatedly attacked the weak GDP rates
during the campaign as an example of the Obama administration's failed economic
policies. He said his program of tax cuts for individuals and businesses,
deregulation and tougher enforcement of trade agreements would double growth to
4 percent or better.
In unveiling an outline of the
administration's tax proposals on Wednesday, Treasury Secretary Steven Mnuchin
said he believed growth above 3 percent would be achievable.
Private economists are more skeptical. They
are forecasting growth of this year around 2.2 percent. That would be an
improvement from last year's 1.6 percent, the weakest showing in five years,
but far below Trump's goal. Many analysts believe that the impacts of Trump's
economic program will not be felt until 2018 because they are not expecting
Congress to approve some version of Trump's tax program until late this year. The Total Investment & Insurance
Solutions
The GDP report released Friday was the first
of three estimates the government will make of first quarter growth. The Total Investment & Insurance
Solutions
The 0.7 percent increase was the worst
showing since GDP contracted by 1.2 percent in the first quarter of 2014. The Total Investment & Insurance
Solutions
In addition to warmer weather holding back
spending on utility bills, the slowdown also reflected a cutback in restocking
of store shelves. The slowdown in inventory rebuilding cut nearly a percentage
point from growth in the first quarter. Also acting as a drag was a reduction
in government spending, which fell at a 1.7 percent annual rate with both the
federal government and state and local governments seeing cuts.
On the positive side, business investment
rose at a 9.4 percent rate, helped by a record surge in spending in the category
that tracks spending in the energy sector. This category had seen sharp
cutbacks in recent quarters, reflecting reductions in exploration and drilling
as energy prices declined.
In recent years, the first quarter has often
turned out to be the weakest for the year, reflecting in part problems the
government has not been able to resolve in adjusting its figures for normal
seasonal changes. The Total Investment
& Insurance Solutions
The Bureau of Economic Analysis, which
prepares the GDP report, has a three-year program aimed at addressing this problem,
which has been particularly problematic in the first quarter. Analysts say that
lingering issues in this area may artificially hold down Friday's initial GDP
estimate for the first quarter.
Many economists believe growth in the current
April-June quarter will rebound to a rate of 3 percent or better as consumer
spending, which accounts for two-thirds of economic activity, regains momentum.
"There are a lot of tailwinds behind
consumers going into the spring, including low unemployment, better wage growth,
high consumer confidence and record stock prices," said Mark Zandi, chief
economist at Moody's Analytics. The
Total Investment & Insurance Solutions
Job growth was strong in January and February
before slowing in March, and the unemployment rate is at a nearly decade-low of
4.5 percent.
Trump noted the weak 2016 GDP performance in
a tweet Wednesday and contended that "trade deficits hurt the economy very
badly." For the first quarter, trade was actually a small positive after a
major drag in the fourth quarter. The
Total Investment & Insurance Solutions
Part of the problem for the administration is
that its efforts to boost the economy are coming after the economic expansion
has been underway for nearly eight years. At this point in a recovery, stimulus
measures tend to have less impact. The Federal Reserve, in fact, has begun
raising interest rates to ensure that the tight job market doesn't trigger high
inflation pressures.
For now, analysts say they think Trump's
stimulus efforts and the Fed's gradual tightening can co-exist. Yet they also
caution that the Fed may eventually raise rates to a point where they will
begin to constrain growth, making it harder for Trump to achieve his GDP goals.The Total Investment & Insurance
Solutions
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