Trump’s First Quarter GDP Numbers Aren’t Exactly Impressive
The first scorecard for President Trump's first economic quarter in office isn't exactly very good.
The first estimate of Gross Domestic Product growth during the first quarter of 2017 reveals sluggish economic growth, indicating the difficulty that the Trump Administration faces in reaching its stated goal of ramping up economic growth to a pace we haven’t really seen during the ongoing recovery from the Great Recession:
The U.S. economy expanded at its slowest pace in three years in the first quarter of this year, according to government data issued Friday morning, as spending by consumers grew at a slower pace and government outlays fell.
America’s gross domestic product, a broad measure of economic growth, grew by just 0.7 percent in the first three months of 2017, a significant slowdown from the previous quarter that economists say is more likely due to measurement error than to Donald Trump’s performance as president. Most economists had been expecting a lackluster growth report for the first quarter, with analysts surveyed by Reuters predicting the figure would be around 1.2 percent.
Yet the report still highlights the challenge this administration — which marks Trump’s first 100 days in office on Saturday — will face trying to meet its target rate of 3 percent economic growth.
A rapid pace of economic expansion is crucial for Trump’s broader economic agenda. He plans to aggressively reduce taxes, which could leave the federal government short trillions of dollars in revenue unless the budget is bolstered by strong economic growth.
Consumer spending expanded in the quarter, though it grew at just 0.3 percent, the slowest pace since 2009. Reduced spending at all levels of government, as well as a strong dollar that weighed on exports and increased imports, brought down the official estimate. Federal economists count exports and public spending toward economic growth, so declines in these categories contributed to the low figure in Friday’s report. Trump has said that closing the gap between imports and exports is one of his chief priorities.
Markets opened on a slide Friday. The Standard & Poor’s 500 index had fallen 0.05 percent and the Dow Jones industrial average was down 0.1 percent by midmorning.
The report contains the first official estimates of economic growth under Trump and was coincidentally released on the 99th day of his new administration. The president and his aides have tried to show demonstrable progress on his chief priorities, including economic issues, before he concludes his first 100 days in office.
The weaker growth is partly due to persistent measurement issues, which have caused the government to underestimate growth in the first quarter for many years — and reflected poorly on other presidents in their first quarter in office.
In the fourth quarter of 2016 the final full quarter of President Barack Obama’s tenure, the economy grew by 2.1 percent, federal economists reported last month.
Most economists expect the pace of growth to rebound in the second quarter. All the same, the disappointing figure suggests a potentially worrisome gap between expectations for the new administration and the reality of how the economy is performing.
There are several caveats that should be applied in looking at this number, of course. First of all, this is simply the first of three estimates of first quarter growth that we will see, with the next coming at the end of May and the final number coming at the end of June. Because of the time involved in gathering the data necessary to measure the growth of an economy as big as ours, these estimates can and do often diverge from each other significantly in either a positive or negative direction. Therefore, it will be two months at least before we can really get a clear picture of how the economy performed in the first three months of the year. Second, as we have seen in years past the first quarter of the year always tends to be one in which the economy underperforms even the forecasts that are given. To a large degree, that’s because of the unpredictability of how the winter weather might impact the economy by causing consumers to stay home rather than go shopping and because one bad storm can impact the movement of good difficult, which even for a brief period could end up costing millions of dollars. If past years are any indication, we can expect at least a modest bounce back later in the year toward a growth rate more consistent with what we’ve seen so far in the recovery. It’s possible, of course, that this could be the beginning of a slowing trend that will be reflected elsewhere in the economy, but we won’t know that until further data is released for things like durable goods orders and employment. Finally, it’s worth noting that this number doesn’t really tell us much about the economic impact of a Trump Presidency. While he has been President for the majority of the first quarter, he hasn’t really accomplished enough to have had a real impact on the economy. Indeed, most of the economic impact of Trump taking office has been limited to a stock market boom that began the day after the 2016 Election and which can be explained at least in part by the fact that investors are expecting that the new Republican-controlled government will implement policies favorable to business. Whether that pans out over the long-term is a bigger question that we don’t know the answer to yet.
As has been the case for roughly the last eighteen months, one of the big questions that this release raises is how it may impact future interest rates decisions by the Federal Reserve. So far, we’ve seen modest increases in rates three times in fifteen months, with increases in December 2015, December 2016, and most recently in March 2017. That last increase is perhaps the most interesting in light of today’s release since it came near the end of the first quarter at a time when the Fed’s Board of Governors no doubt had access to at least some of the preliminary data making up today’s report. Presumably, if they believed that this was the beginning of a trend they likely would have held off on raising rates so the fact that they did so could indicate that they believe that these numbers will be temporary and that the economy will be back to the 2-2.5% growth rate we’ve seen for the majority of the recovery that began early in 2009.
On a final note, and notwithstanding one of the caveats I noted above, these numbers do pose a challenge for the new Administration if they hold up under revisions. The tax and spending programs that the Trump Administration is proposing and contemplating depend heavily on the idea that we’ll see economic growth at 3% and higher in the near future. Without it, these policies will result in revenue shortfalls that could be in the trillion dollar range and more, resulting in sharply higher budget deficits and a higher national debt that will likely lead to higher interest rates and slower economic growth. What these numbers, and the forecasts for the year ahead, tell us is that it’s going to be difficult to achieve the Administration’s forecast levels of growth, and that could mean significant trouble ahead.