Economic Growth Weakens to 3-Year Low of 0.7 Percent

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 repeats a pattern that has characterized the recovery: lackluster beginnings to the year.

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. Analysts blame in part the unusually warm winter, which meant less spending on utility bills.

Economists believe the slowdown will be temporary. They forecast GDP growth will rebound to 3 percent or better in the current quarter.

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.

President Donald 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 GDP report released Friday was the first of three estimates the government will make of first quarter growth.

The 0.7 percent increase was the worst showing since GDP contracted by 1.2 percent in the first quarter of 2014.

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 449 percent 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 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.

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.

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.

Source: newsmax – Economic Growth Weakens to 3-Year Low of 0.7 Percent

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