Saturday, April 29, 2017

G.D.P. Report Shows U.S. Economy Off to Slow Start in 2017
New York Times
APRIL 28, 2017

Americans say they feel more optimistic about the economy since President Trump was elected. But they certainly are not acting that way, and that is shaping up to be a challenge for his administration.

Consumers pulled back sharply on spending in early 2017, the Commerce Department said on Friday, reducing the economy’s quarterly growth to its lowest level in three years. In fact, the 0.7 percent annual growth rate for the period is far below the 2.5 percent pace in President Barack Obama’s final three months in office, let alone Mr. Trump’s 4 percent target.

The caution among consumers was particularly notable on big purchases like automobiles. Other indicators were stronger — businesses invested at a healthy pace — but that was not enough to offset the headwinds from feeble retail sales and falling inventories.

The rate of change in the gross domestic product, based on quarterly figures adjusted for inflation and seasonal fluctuations.

Through eight years of a fundamentally tepid recovery, the promise of stronger economic growth that is always just around the corner has had a waiting-for-Godot quality. Investors and Wall Street seem confident that this time, the predictions will finally come true — hence the 11 percent surge in stocks since the election — but some independent economists are wary.

The softness last quarter also provides crucial ammunition for the Trump administration’s arguments that big tax cuts and regulatory rollbacks are necessary for the economy to grow the way it did in the 1980s and 1990s.

Tax cuts, regulatory relief, trade renegotiations and an unfettered energy sector are needed “to overcome the dismal economy inherited by the Trump administration,” said Commerce Secretary Wilbur Ross. “Business and consumer sentiment is strong, but both must be released from the regulatory and tax shackles constraining economic growth.”

The first-quarter fade is also sure to be noticed by the Federal Reserve as it contemplates whether to proceed with two more interest-rate increases planned for this year.

Federal Reserve policy makers are set to meet next week, and while there is little expectation that an interest-rate increase will be announced when the meeting ends on Wednesday, the latest economic reading could sway the Fed’s outlook. The monthly report on job creation is due next Friday, and a strong showing could ease some of the concern over the lack of vigor in the first quarter.

The job market has proved remarkably resilient even as quarterly growth has wobbled, and the unemployment rate sank to 4.5 percent in March, the lowest in nearly a decade.

Those seeking encouraging news about the first quarter could find it in separate reports on Friday. The Labor Department said an index reflecting labor costs had its best showing in almost a decade, indicating that falling unemployment and faster hiring is translating into better wages — something notably absent in the recovery until recently.

Reaffirming its recent findings, the University of Michigan said its consumer sentiment index finished April with a decidedly bullish reading of 97, up from 87.2 just before the election.

The White House provided a statement saying the report on gross domestic product might have been influenced by seasonal factors, but “shows that we still have work to do to get the economic growth President Trump wants and expects.”

And in an interview with Fox News on Friday, Mr. Trump said that, with better trade deals, the United States should be able to lift the rate of economic growth to 5 percent or more in a few years.

With personal consumption accounting for nearly 70 percent of all economic activity, however, the administration will be hard pressed to lift growth substantially if consumers remain cautious about opening their wallets.

Jason Furman, chairman of the Council of Economic Advisers under Mr. Obama, said he found the disconnect between findings of optimism and actual behavior puzzling, though he added, “It’s possible it was a blip.”

On the other hand, something more significant may be happening. The rising cost of necessities like health care, housing and education is crowding out discretionary spending for middle-class Americans, said Stephanie Pomboy, founder of MacroMavens, an independent economics consulting firm in New York.

And the tax cuts the administration is proposing are unlikely to reverse that trend, she added.

“Consumers aren’t spending out of desire but out of obligation,” she said. “And I believe that since the recession and the bursting of the housing bubble, the middle class wants to save. They don’t want to get back into the position they were in after 2008.”

She noted that although the Obama administration got temporary tax breaks through Congress as part of its stimulus package in 2009, tax credits and other incentives did not substantially increase consumer spending.

Ms. Pomboy was among the earliest voices warning that a burst of first-quarter momentum was unlikely, and she is similarly cautious about the rest of 2017. “There are a lot of moving parts to this report for the first quarter, but none suggest we should look for an acceleration in growth going forward,” she said.

The initial weakness this year does follow a pattern of sluggish annual starts since the recovery began, when momentum has picked up in subsequent quarters.

When growth is measured year over year, rather than quarter over quarter, the latest data reveal a 1.9 percent annual growth rate, which is almost identical to the broader trend of the postrecession period.

Most economists on Wall Street are looking for a rebound over the rest of 2017, with growth rising to about 3 percent in the current quarter.

“We see ebbs and flows in consumer spending, and it’s still on an upward trend,” said Scott Anderson, chief economist at Bank of the West in San Francisco. Noting that consumption rose sharply in mid- to late 2016, Mr. Anderson suggested some payback was probably inevitable.

While he is more sanguine about the economy’s prospects than Ms. Pomboy is, Mr. Anderson shares her skepticism about the impact White House policy will have.

“The reality, as we have seen in the first 100 days, is that it’s a lot harder for the administration to achieve their policy goals and deal with Congress than they probably thought during the campaign,” he said.

“Even if you are president of the United States, you have to deal with 535 individuals with different constituencies and agendas on Capitol Hill,” Mr. Anderson said. “It’s not like running a commercial real estate company where everyone has to march to the same drummer.”

“I’ve never been a believer in the ‘Trump bump’ for this year,” he added. “We’re in the same economy we’ve been in all along.”

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