The US economy expanded at its weakest pace in three years during the opening months of the year, underlining the daunting task facing Donald Trump’s administration as it seeks to attain ambitious growth targets.
Gross domestic product grew at a 0.7 per cent annual rate in the first three months of 2017, according to the Bureau of Economic Analysis, a sharp drop from 2.1 per cent at the end of last year. Wall Street had forecast 1 per cent growth.
The numbers were dragged down by a marked slowdown in growth of consumer purchases of goods including cars, as well as business cutting back spending on inventories. The slowdown was partly offset by firm exports, and improved business and housing investment.
With Mr Trump preparing to mark his first 100 days in office on Saturday, the lacklustre official figures suggest that the fillip the president has given to consumer and business confidence — as well as to share prices — has yet to bolster broader economic activity.
A spate of survey indicators reflects optimism among executives and investors about the prospects of Mr Trump delivering on tax cuts, looser regulation and infrastructure projects. In January, a survey by the National Federation of Independent Business of business leaders’ optimism rocketed to the highest reading since 2004 and has lost only a little ground since.
By contrast, a range of data has shown a weakening in the real economy, including sluggish retail sales, and Friday’s GDP data revealed the slowest growth of household spending since 2009.
The divergence between soft and hard economic data as become increasingly noticeable over the past five months, but analysts say it is too early in Mr Trump’s presidency to draw conclusions about his likely impact on the economy. Still, economists said if hard data such as GDP remain sluggish, there is a risk sentiment figures will start to fall back as well.
Wall Street broadly shrugged-off Friday’s report amid expectations for a growth rebound in the current quarter. The 10-year Treasury yield initially rallied as much as 3.96 basis points to 2.334 per cent after the data were released, but eased back to 2.302 per cent. The S&P 500 equities barometer edged lower, but was still up by more than 1 per cent on the week.
First-quarter GDP numbers have tended to be lacklustre in recent years because of seasonal factors that statisticians struggle to strip away from the data.
According to Jim O’Sullivan of High Frequency Economics, over the past seven years, real growth has averaged just 1 per cent at an annual rate in the first quarter, compared with averages of 2.5 per cent for the second and third quarters and 2.3 per cent for the fourth quarter. “We expect re-acceleration in the second quarter,” Mr O’Sullivan said in a note.
Friday’s numbers are unlikely to deter the Federal Reserve from its plans to continue gradually tightening monetary policy. The central bank’s officials have stressed the volatility of GDP reports, a point underscored by the fact that inventory fluctuations subtracted 0.9 percentage point from the growth rate.
Among the more positive signs in the report was growing business investment at a 9.4 per cent annual pace, as well as a 5.8 per cent strengthening in exports. The core price index for personal consumption expenditures — a measure of inflation — rose 2 per cent in the quarter compared with a year earlier.
Mr Trump’s administration is relying heavily on dramatically faster growth to make its fiscal policy proposals add up. Steven Mnuchin, US Treasury secretary, has argued that far-reaching tax cuts unveiled this week would pay for themselves thanks to quicker economic growth and has downplayed the threat of higher budget deficits.
Mr Mnuchin has suggested the US could achieve sustained economic growth of 3 per cent. In 2014 the US economy grew 2.4 per cent, followed by 2.6 per cent in 2015 and just 1.6 per cent in 2016.
But tax reform remains far off — tax proposals Mr Mnuchin presented this week lacked detail — and the president has yet to provide clear proposals on his infrastructure ideas.
Despite the disappointing growth numbers, the US labour market has remained buoyant as the country continues its uninterrupted progress towards full employment. The jobless rate was just 4.5 per cent in March. Separate figures on Friday from the Bureau of Labor Statistics showed solid year-on-year growth of 2.5 per cent in wages and salaries for March, up from 2.3 per cent in December.
