May 05, 2017 03:30:54 AM
Falls Church, VA (AIIS) - Economic growth slowed to a crawl during the first quarter, with gross domestic product (GDP) increasing by just 0.7 percent, the lowest rate in three years, according to the Bureau of Economic Advisers (BEA).

Consumer spending, which accounts for about 70 percent of the nation’s economic activity, grew by only 0.3 percent in Q1. In the fourth quarter of 2016, spending increased by 3.5 percent, while the overall economy expanded by 2.1 percent.

While the numbers to start the year appear discouraging, calculating growth during the first quarter has been problematic for the BEA for some time. It has attempted to revise its seasonal adjustments to make Q1 numbers more reflective of economic conditions, but The Washington Post noted that difficulties in getting these adjustments right “may have shaved as much as 1 percentage point off growth” during the most recent quarter.

In addition, other factors may support a cautiously optimistic attitude. Business investment increased 9.4 percent, making up for sluggish consumer spending, which has typically been the driver of growth in recent years. Also, part of the slowdown resulted from a reduction in government spending and slow restocking of inventory, neither of which is likely to continue for long.

The BEA will update its growth estimates for the first quarter in May and June.

The economy added 98,000 jobs in March, and, despite that low number after two months of strong job growth, the unemployment rate fell 0.2 percentage points to 4.5 percent, the lowest level in nearly 10 years, the Bureau of Labor Statistics reported.

The Federal Reserve’s Federal Open Market Committee (FOMC), at its May 2-3 meeting, noted that, “the labor market has continued to strengthen even as growth in economic activity slowed.” As expected, the committee declined to raise interest rates after doing so in March for only the third time since the end of the Great Recession.

The Fed is thought to be looking to raise rates at least two more times this year. Following its May meeting, the FOMC released a statement asserting, in its usual vague way, that, “The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

Fed Chairman Janet Yellen, meanwhile, recently used a car analogy to describe the central bank’s current approach to the economy.

“Before, we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could,” Yellen said. “Now, allowing the economy to kind of coast and remain on an even keel – to give it some gas but not so much that we are pressing down hard on the accelerator – that’s a better stance of monetary policy.”

The “Trump bump” that elevated stock prices since November has leveled off. Between Election Day and March 1, the Dow Jones Industrial Average rose 15 percent. Over the next two months, though, it dipped almost 1 percent, ending April at 20,940.51. The S&P 500 Index, which has followed a similar pattern since the election, closed at 2,384.20 on the last trading day of April.

President Trump, who wants to increase exports while cutting back on imports – especially in certain markets, such as steel – said in April that, “I think our dollar is getting too strong.” Though the value of the dollar took a small hit from this remark, it closed April about where it started the month, trading at 0.92 euros, 0.77 pounds, 111.44 yen and 6.89 yuan.

While confidence in the economy remains solid, it waned a bit in April. The Conference Board’s Consumer Confidence Index slipped from 124.9 in March to 120.3. (The index’s baseline is 100 in 1985.) “Consumers were somewhat less optimistic about the short-term outlook for business conditions, employment and income prospects,” the board’s director of economic indicators said. The University of Michigan’s Index of Consumer Sentiment was nearly unchanged from March, registering 97 in April. The Wolverine poll has identified significant partisan differences among survey respondents in recent months: “Favorable economic developments were cited by nearly all Republicans in April, while three-quarters of Democrats reported hearing negative news about the economy.”

In the manufacturing sector, the Institute for Supply Management’s Purchasing Managers Index dipped 2.4 points from March to 54.8. (An index over 50 indicates growth in the sector.) This was the second monthly decline following six straight months of increases. Of 18 industries surveyed, 16 reported growth in April.

Housing starts fell 6.8 percent from February to March, but were still 9.2 percent above the March 2016 level, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales increased 4.4 percent month-to-month and 5.9 percent from a year earlier, the National Association of Realtors reported. The association’s chief economist said, “Although finding available properties to buy continues to be a strenuous task for many buyers, there was enough of a monthly increase in listings in March for sales to muster a strong gain. Sales will go up as long as inventory does.”

Vehicle sales were down in April when compared to last year, even among light-duty trucks, a segment that has shown consistent growth for some time. Car sales fell 11.1 percent from April 2016, while truck sales slipped 0.1 percent. Through the first four months of the year, total car sales declined 11.4 percent from 2016, but truck sales have increased 4.3 percent.

While campaigning for president, Trump talked about annual growth being as high as 4 percent if he were to be elected. While this probably had more to do with Trump’s tendency to use hyperbole than with any realistic expectations, the first quarter results show how far the country has to go before even approaching such a lofty number. Growth projections for this year are generally around 2-2.5 percent, and Trump’s own treasury secretary, Steve Mnuchin, said that 3 percent growth is still “probably” two years away, adding, “I think there are three components to the [president’s] economic plan: It’s tax, it’s regulatory relief and it’s trade. And obviously tax is going to have the most impact on stimulating the economy in the short run.” If that analysis is correct, it may take longer than two years to reach 3 percent growth. While Trump has made progress in using executive actions to reduce regulatory burdens, and the tax plan outline that the White House released shows some promise, the president has not yet demonstrated an ability to accomplish his legislative goals – even with Republicans controlling both the House and Senate. But while he still has things to learn about working with Congress, at least Trump is moving in the right direction on these issues. However, on the third component cited by Mnuchin – trade – the president is pursuing policies that will do much more harm than good. Trump seems to regard the nation’s trade deficit in purely negative terms, failing to recognize that imports provide businesses and consumers with the opportunity to acquire goods and materials that they either cannot buy domestically or that they would have to pay a much higher price for if they did. This increased efficiency helps the economy (even though, strictly from a data analysis perspective, imports are a deduction from economic growth). Reducing imports will only make things more expensive for Americans, and this administration’s most aggressive actions on trade – such as the Commerce Department’s Section 232 investigation of steel imports – could invite retaliation from multiple nations that will lead to a trade war. If that happens, the president’s legacy will not be 4 percent growth, it will be a global recession.

Courtesy : AIIS