Beyond Weak First Quarter, Trump's Growth Goal Getting Tougher

by Sho Chandra and Patricia Laya

April 26, 2017

The U.S. economy is in better shape than Friday’s first-quarter figures will probably indicate, but getting the growth that President Donald Trump wants is becoming even more difficult.

Gross domestic product probably expanded at a 1 percent annualized rate from January through March, according to the median forecast in a Bloomberg survey of economists. As some transitory drags dissipate, economists project a second-quarter rebound similar to the pattern of the past three years.

Beyond the quarterly gyrations and a surge in optimism, annual estimates show just 2.2 percent to 2.3 percent growth through 2019, a tad above the average pace during the almost eight-year expansion.

While consumer spending will keep underpinning a moderately growing economy, Trump’s goal of 3 percent to 4 percent sustained expansion looks increasingly out of reach. For starters, the U.S. faces longer-term constraints such as slowing labor-force growth, and productivity remains stubbornly weak.

On top of that, though some regulations have eased and Trump’s trade rhetoric has softened, there has been little real action on major policy changes such as tax cuts, health-care reform and infrastructure investment, which are among the president’s top priorities.

“We’re in more of a steady state for the economy,” said Scott Brown, Raymond James Financial Inc.’s chief economist in St. Petersburg, Florida. While the economy is in decent shape despite a weak first quarter, “not much at all has happened on policy,” he said.

Trump’s GDP goal “is overly optimistic,” Brown said. “We could get a quarter or two of 3 or 4 percent growth, but it won’t last.”

On an annual basis, the U.S. last exceeded 3 percent more than a decade ago. Treasury Secretary Steven Mnuchin said as recently as Saturday that “we believe we can get to 3 percent or more sustainable economic growth,” while the White House website gives a target of 4 percent.

Temporary Drag

Last quarter’s GDP weakness likely reflects a temporary drag from lower utility bills and tax-refund delays that weighed on consumer spending, which accounts for about 70 percent of GDP. The Bloomberg survey projection of a 0.9 percent pace for consumption would amount to the worst first quarter of the expansion that began in 2009. 

While household purchases are forecast to recover amid steady hiring and wage gains, some risks remain for the coming quarters. Automobile sales seem to be plateauing, faster inflation is squeezing Americans’ purchasing power amid tepid wage gains, and the Federal Reserve’s plan to continue raising interest rates will make credit more expensive.

Other figures suggest the economy is doing just fine, according to Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. Hours worked are growing at a faster pace than the 2016 average, while industrial production excluding utilities is expanding at a 4 percent rate. The Institute for Supply Management’s monthly surveys of manufacturing and service-industry executives have recently pointed to solid expansion, Crandall said in a research note this week.

Still, as the president reaches 100 days in office this week, it’s becoming tougher to live up to the lofty expectations seen in confidence surveys and stock-market gains. Republicans in March withdrew a health-care bill and the administration’s August deadline for passing a tax plan has become less realistic.

“People need to see a tangible improvement if that confidence is going to manifest itself in hard economic data,” Gus Faucher, chief economist at PNC Financial Services Group Inc., who doesn’t expect much of a fiscal policy boost to GDP growth this year. “Sure, stock prices are up and there’s a wealth effect that may boost consumer spending, but unless we get some tangible policies and not just feel-good stuff then I don’t think the boost in confidence is, in and of itself, going to lead to anything.”

Corporate America has little incentive to accelerate spending as executives wait for lower taxes, an infrastructure boost and deeper cuts to regulations such as those from Dodd-Frank, the 2010 financial oversight law. While consumers are continuing to prop up the economy, getting faster growth calls for a heftier contribution from business investment.

Trade Effect

There’s also a question mark over trade, which depressed GDP gains during most of the past three years due to a gradually widening deficit. While global growth is picking up, the strong dollar is more than offsetting that improvement, so net exports may be a “negative generally,” according to PNC’s Faucher.

On the policy side, signals are mixed: Trump has recently softened his tone and didn’t act on his threats to name China a currency manipulator or scrap Nafta, but on Monday he slapped tariffs of up to 24 percent on Canadian softwood lumber and has recently blasted Canada’s system of protectionist dairy quotas.

“There’s certainly a potential for big disruptions in trade flow from the Trump administration,” Faucher said.

So far, early demonstrations of Congress’ inability to reach a policy consensus offer clues on the future of Trump’s goal to make big changes and spur the economy, said Brown of Raymond James. The most likely scenario is growth around the 2 percent average of this expansion or a bit weaker, unless policies can compensate for an aging workforce -- via more immigration -- and address slow productivity.

“It’s not the end of the world, though,” Brown said. “If you recognize what your limits are, that helps.”