U.S. Economy Unexpectedly Slows in Fourth Quarter, Misses Trump’s Target

GDP growth
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The U.S. economy slowed unexpectedly in the fourth quarter of 2017 as gross domestic product (GDP) grew at an annualized rate of 2.6%. This breaks a two-quarter streak of GDP growth above three percent.

Overall, U.S. GDP advanced 2.3% in 2017, which is better than the 1.5% GDP growth experienced in 2016 but significantly lower than President Donald Trump’s goal to push annual U.S. GDP in excess of three percent.

Fourth-quarter GDP of 2.6% is well below analyst forecasts of growth over three percent. It’s significantly lower than the 3.4% the Atlanta Fed was predicting and the lofty 3.88% the Federal Reserve of New York was championing.

Personal consumption was up 3.8% in the fourth quarter after climbing 2.2% in the third quarter. Unfortunately, credit card spending also surged and the U.S. personal savings rate has cratered to the lowest level since the financial crisis. This suggests American consumers cannot maintain this pace of spending and keep the U.S. economy chugging along.

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Big holiday spending couldn’t counter rising imports, and trade shaved 1.13 percentage points from GDP growth. Imports increased at the fastest pace in seven years. Rising imports will make it very difficult for Trump to boost annual GDP growth to three percent.

For Trump to get annual GDP above three percent, he’ll have to reduce the trade deficit and boost U.S. exports. This could, in the face of recently announced tariffs against solar panels and washing machines, lead to a trade war. This would put an even greater dent in U.S. GDP growth.

As for Trump’s massive tax cuts that were passed in December, we will have to wait until the next quarter to see if corporations passed on their windfall to employees in the way of meaningful raises. It’s anyone’s guess whether that extra cash flow will help increase GDP growth in the first quarter of 2018 and beyond.

Analysts speculate that the tax cuts will help boost the U.S. economy in the short term, but even then, GDP growth won’t match White House projections.

Despite all the promises from Trump and his fellow Republicans, the U.S. economy is performing much like it did under Barack Obama. And while U.S. GDP has grown every year since 2009, that growth has not been consistent. In 2010, GDP growth was 2.5%. This was followed by growth of 1.6% (2011), 2.2% (2012), 1.7% (2013), 2.6% (2014), 2.9% (2015), 1.5% (2016), and 2.3% (2017).

With all that’s happening in the U.S. economy right nowa booming stock market, post-hurricane repairs, soaring consumer credit, rising consumer optimism, etc.one would think the fourth quarter GDP would be higher than 2.6%.

This just goes to show that Trump has a steep hill to climb if he wants to keep his campaign promise of annual GDP growth in excess of three percent.

 

Sources:

National Income and Product Accounts
Gross Domestic Product: Fourth Quarter and Annual 2017 (Advance Estimate)
,” U.S. Department of Commerce, last accessed January 26, 2018.

GDPNow,” Federal Reserve Bank of Atlanta, last accessed January 26, 2018.

Nowcasting Report,” Federal Reserve of New York, last accessed January 26, 2018.

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