Trump touts growth while slowdown looms
Consumer spending and other pillars of U.S. growth cools
U.S. President Donald Trump was quick to tout the U.S. economy’s surprisingly strong upturn in the first quarter, but it still seems poised for a slowdown this year. While gross domestic product surpassed all analyst expectations, kicking off the year with a 3.2-per-cent advance, more than half the gain came from the volatile trade and inventories components that may soon reverse. Underlying pillars of growth weakened. Consumer spending, the largest chunk of the economy, cooled for the third straight quarter, and nonresidential business investment grew at the second-slowest pace since Trump took office.
The question remains just how strong is the world’s largest economy. With inflation still muted, that means the Federal Reserve is likely to keep interest rates on hold for some time and Trump is unlikely to see a repeat of 2018’s three-per-cent annual growth, which he argues can be sustained. “The thought that the economy’s rate of growth this year will be much slower than last is still right,” said Mark Zandi, chief economist at Moody’s Analytics Inc. “I don’t think we’re going to see an economy that’s nearly as strong as last year because the benefits of those tax cuts are gone.”
The economy’s performance, in Trump’s words, was still “far higher than the high expectations” and justified the increased confidence in the outlook that economists have shown since the start of the year, when things looked bleaker. The U.S. and China have moved closer to ending their trade war and the longest-ever federal government shutdown ended in January, though headwinds remain from weaker global growth — amid trade tensions with various countries — and the waning impact of tax cuts.
While 3.2 per cent is a “great number,” consumer spending “has to get stronger for the economy to remain in an expansion,” said Michael Gapen, chief U.S. economist at Barclays Plc. “We think it will, but it’s not a silver lining. Underneath the hood, household spending was soft and further expansion is going to require households to get back to a normal space of spending.”
The data showing faster growth and tame inflation helped push Treasury yields lower Friday. U.S. stocks were little changed after paring earlier losses. The pickup in growth came despite the government shutdown through most of January, which subtracted 0.3 percentage point from the quarterly growth pace on the reduction in services. Commerce said the closure also chopped the fourth quarter by 0.1 point, while adding that the full effects can’t be quantified. Other recent reports have pointed to signs of strength, with March retail sales rebounding and a proxy for business investment rising sharply. U.S. stocks also rallied the most since 2009 in the first quarter and this month extended gains to a record, easing some concern about the durability of growth.
Fed policy-makers next week are expected to hold interest rates steady while making adjustments to their characterization of the economy to reflect the firmer data. Financial markets still see the central bank cutting rates in the coming year, and the Trump administration is keeping up pressure for a reduction. Friday’s report showed net exports added 1.03 percentage point to growth while rising private inventories added 0.65 point. The combined boost of 1.68 point was the biggest in six years. Excluding government and the volatile trade and inventory components, final sales to private domestic purchasers cooled to a 1.3-per-cent pace that was the slowest since 2013. Economists monitor this measure for a better sense of underlying demand, especially in a period like the first quarter when rising inventories and a narrower trade deficit propped up GDP. The report showed non-residential business investment rose 2.7 per cent, reflecting the third straight decline in structures and a 0.2-per-cent advance for equipment spending that was the weakest since 2016. Residential real estate was a drag on growth for the fifth straight quarter, contracting at a 2.8-per- cent annual pace and subtracting 0.11 percentage point from the pace of GDP gains, as housing starts and sales remained relatively sluggish. At the same time, the sector is starting to regain some steam amid lower mortgage rates and more-affordable properties. “Is the underlying growth trend of the economy 3.2 per cent? Probably not,” said Jay Bryson, global economist at Wells Fargo & Co. “The economy isn’t stalling by any means, but the underlying momentum just isn’t there. We’re looking to relatively modest investment, there just hasn’t been a sustained pickup.”
I don’t think we’re going to see an economy that’s nearly as strong as last year because the benefits of those tax cuts are gone.