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U.S. Economy Grew at 3.2% Rate in First Quarter U.S. Economy Grew at 3.2% Rate in First Quarter
(about 7 hours later)
Rumors of the economic expansion’s death appear to have been greatly exaggerated. Reports of the economic expansion’s death appear to have been greatly exaggerated.
Gross domestic product, the broadest measure of goods and services produced in the economy, rose at a 3.2 percent annual rate in the first three months of the year, the Commerce Department said Friday. That is significantly better than most economists expected, and far better than the dour forecasts of early this year, when many forecast a near stall in growth. (Friday’s figures are preliminary and will be revised at least twice in the months ahead.) The United States economy surged unexpectedly in the first quarter, the Commerce Department said Friday, allaying concern that financial-market volatility and a prolonged government shutdown would cause a slump.
Economists warned that the report was inflated by short-term factors and probably overstated the underlying pace of growth. Most anticipate a downshift as the year progresses, and hardly any independent economists expect that President Trump will be able to deliver the 3 percent growth he has promised this year. And with those hurdles in the past, and with investors and consumers alike showing renewed optimism, it is now all but certain that the decade-long expansion will become the longest on record later this year.
Still, after a rough winter, the economy appears to have entered the spring fundamentally intact. Stock-market turmoil, a partial government shutdown and a crippling “polar vortex” failed to bring the decade-long recovery to an end. And with the job market still strong and consumers confident, fears of a recession appear to have been set aside.
“The angst has settled, and the economy has come back,” said Ben Herzon, an economist with Macroeconomic Advisers, a forecasting firm. “I just can’t point to anything now that’s going to push us into recession.”“The angst has settled, and the economy has come back,” said Ben Herzon, an economist with Macroeconomic Advisers, a forecasting firm. “I just can’t point to anything now that’s going to push us into recession.”
The unexpectedly strong report is good news for Mr. Trump, who has often treated G.D.P. — along with the stock market, the trade deficit and other economic indicators — as a sort of personal scorecard. Late last year, that scorecard wasn’t looking good for Mr. Trump, as growth slowed, the trade deficit ballooned and the stock market plunged. Gross domestic product, the broadest measure of goods and services produced in the economy, rose at a 3.2 percent annual rate in the first three months of the year. That is faster than most economists expected, and far better than the dour forecasts of early this year, when many forecast growth could fall below 1 percent.
Now, however, the trade deficit has narrowed, stock indexes are setting new highs and G.D.P. defied predictions of a stall. The job market, too, rebounded quickly from a February hiccup. Some of those trends may be temporary, but the reckoning has been delayed for now. Friday’s figures are preliminary and will be revised at least twice in the months ahead.
“We’re knocking it out of the park,” Mr. Trump told reporters as he left the White House Friday morning for an event in Indianapolis. Economists warned that the report was inflated by short-term factors and probably overstated the underlying pace of growth. Most anticipate a downshift as the year progresses.
Friday’s report could also lead Mr. Trump to ease his pressure on the Federal Reserve, which he has recently criticized for failing to do enough to support the economy. Still, after a rough winter, the economy appears to have entered the spring fundamentally intact. That is good news for President Trump, who is counting on the strong economy to improve his chances for re-election next year. Speaking to reporters on his way to an event in Indianapolis on Friday, he called the first-quarter growth figure “an incredible number.”
Economists don’t expect the Fed to take any action at its policy-setting meeting next week, and Friday’s report is unlikely to change that. Ellen Zentner, chief United States economist for Morgan Stanley, said Fed policymakers would recognize that the burst of growth in the first quarter was temporary, and that inflation has actually slowed. “We’re number-one economy right now in the world, and it’s not even close,” he said.
The first-quarter growth figure was inflated by a buildup of inventories and by a steep decline in imports. Both trends are likely to reverse in the second quarter. (Imports count as a negative in G.D.P. accounting, so a decline in imports makes growth look stronger. Exports, which add to G.D.P., rose significantly.) Mr. Trump has often treated G.D.P. — along with the stock market, the trade deficit and other economic indicators — as a sort of scorecard for his presidency. Late last year, that scorecard wasn’t looking good, as growth slowed, the trade deficit ballooned and the stock market plunged.
For a better gauge of the economy’s strength, analysts recommend focusing on a different number, which strips out trade and inventory effects as well as the impact of government spending. That measure, known as final private sales, came in at 1.3 percent, down from 2.6 percent in the fourth quarter of 2018 and the weakest showing since 2013. Kevin Hassett, chairman of the president’s Council of Economic Advisers, acknowledged on Friday that there had been nervousness inside the White House that the partial federal government shutdown, which idled hundreds of thousands of federal workers and disrupted countless private businesses, could cause growth to stall in the first quarter. A sharp drop in consumer spending in December and a slowdown in job growth in February added to those fears.
Next quarter, the pattern could reverse: Inventories are likely to shrink and imports to grow, pushing down overall G.D.P. growth even if the underlying economy is essentially unchanged. Things have looked up since then, however. Consumer confidence rebounded quickly once the shutdown ended, and retail sales were strong in March. Hiring, too, has recovered. And the stock market has roared back, hitting record highs this week.
“Given the backdrop of weak global trade, it would be amazing if net trade were to continue to add to G.D.P. as the year goes on,” said Paul Ashworth, chief United States economist for Capital Economics. “Everything kind of turned around relatively quickly,” Mr. Hassett said. “The government reopened. A lot of uncertainty resolved. Equity markets started to get more confident, and then, I think, a lot of other people did, too.”
Consumer spending has been the bedrock of the recovery, staying strong even as other sectors have ebbed and flowed. So economists were nervous when spending tumbled unexpectedly in December and failed to rebound in January. Several factors explain the renewed optimism. Efforts by Chinese authorities to stabilize their slumping economy seem to be working, damping fears of a global economic slowdown. China and the United States also appear to be nearing a trade deal, reducing the risk of a new round of tariffs.
Since then, things have looked better. Consumer confidence, which fell sharply in December and January, quickly recovered once the shutdown ended and financial markets stabilized. Retail sales bounced back strongly in March. Perhaps the most important factor in the turnaround: the Federal Reserve. Markets began to stabilize, and stocks climbed again, after Jerome H. Powell, the Fed chairman, said in January that the central bank would be “patient” before raising interest rates again, after four increases in 2018.
The net result: Consumer spending was weak in the first quarter, rising at just a 1.2 percent rate, the slowest in a year. But the quarter ended on a strong note, and most economists see little reason to worry looking ahead. Mr. Trump and his allies had been sharply critical of the Fed’s rate hikes. The president has said he will nominate one such ally, Stephen Moore, to fill an opening at the Fed. On Friday, Mr. Moore, an informal economic adviser to Mr. Trump, said the new growth figure made him feel “100 percent” vindicated in his criticisms.
“We did see strengthening throughout the quarter with momentum building,” said Ms. Zentner said. “We’ve got nice consumer spending momentum going into the second quarter.” “Thank God the Fed listened to me,” Mr. Moore said.
But if consumers were quick to put the winter winds behind them, businesses still seem wary. Business investment slowed in the first quarter, and the miniboom in manufacturing that greeted Mr. Trump’s first two years in office appears to be fading. Mr. Powell has said the president’s criticisms won’t influence the bank’s decisions. Still, Mr. Trump has gotten what he wanted: When Fed policymakers meet next week, it is essentially a foregone conclusion that they will leave interest rates unchanged.
Fed officials indicated in March that they did not expect to raise rates again this year, in part because they forecast a growth slowdown from last year, and still-tame inflation. Friday’s report showed inflation slowing yet further in the first quarter.
Indeed, despite the robust G.D.P. figure, the underlying pace of economic growth has slowed since the middle of last year, when tax cuts and government spending briefly pushed the growth rate above 4 percent.
The most important components of the economy — consumer spending and business investment — were both weak in the first quarter, and the housing market contracted for the fifth quarter in a row. The strength in G.D.P. was partly the result of a surge in inventories and a drop in imports, both of which are likely to reverse in the second quarter.
For a better gauge of the economy’s health, analysts recommend focusing on a different number, which strips out trade and inventory effects as well as the impact of government spending. That measure, known as final private sales, came in at 1.3 percent, down from 2.6 percent in the fourth quarter of 2018 and the weakest showing since 2013.
“Domestic demand in the economy — investment, consumer spending — that was weak,” said Ellen Zentner, chief United States economist for Morgan Stanley.
Economists expect consumer spending to bounce back in the second quarter, as December’s market drop and January’s shutdown fade into memory. But businesses remain cautious, in part because they expect the economy to cool gradually as the effects of last year’s tax cuts and spending increases fade.
“If there’s weakness, it’s in the business-spending data,” said Michael Gapen, chief United States economist for Barclays. “It has yet to rebound in a meaningful way following the end of the government shutdown.”“If there’s weakness, it’s in the business-spending data,” said Michael Gapen, chief United States economist for Barclays. “It has yet to rebound in a meaningful way following the end of the government shutdown.”
Worthington Industries, an Ohio-based metals manufacturer, has been hit by Mr. Trump’s steel tariffs, which have driven up costs and led some customers to delay orders. But those effects have been offset by a strong underlying economy, which has kept demand high and made it easier for the company to pass on costs to customers. Worthington Industries, an Ohio-based metals manufacturer, has seen no sign of a slowdown from its domestic customers, said Andy Rose, the company’s president. Still, spending isn’t rising as quickly as it did early in the recovery, and slower growth in China and other countries has hurt sales overseas, while Mr. Trump’s steel tariffs have driven up costs.
“My belief is that the economy is very strong right now, and that a little price inflation is really not going to dampen demand that much,” said Andy Rose, Worthington’s president. “We’re not seeing a drop-off, but I think the challenge for a lot of U.S. companies right now is to find where the next leg up is going to come from,” Mr. Rose said. “How are we going to drive earnings growth going forward if we’re not going to see a big increase in demand?”
Still, a slowdown in China has sapped what had been a major source of growth for American exporters in recent years. And while American consumers are doing well, their spending isn’t rising fast enough to fill the gap. That means companies are looking for other ways to improve profitability, including cutting costs. That means companies are looking for other ways to improve profitability, including cutting costs.
“Cost cutting certainly is a late-cycle exercise,” Mr. Rose said. “Labor costs are going up. You have no choice but to try to save costs where you can.”“Cost cutting certainly is a late-cycle exercise,” Mr. Rose said. “Labor costs are going up. You have no choice but to try to save costs where you can.”
That caution may reflect nervousness about how long the economic expansion, already among the longest on record, can last. But while economists say another recession is inevitable eventually, they see little evidence that one is on the horizon. That caution may reflect nervousness about how long the economy’s run of good fortune can last. The Great Recession officially ended in June 2009; in July, the expansion will officially become the longest on record.
Economists do expect growth to slow this year, as the effects of tax cuts and government spending increases fade. But they are less nervous than a few months ago, when markets were in turmoil, trade tensions were flaring up and the Federal Reserve seemed uncertain about which way to turn. Economists, however, say that expansions do not die of old age — there has to be a cause. And while they expect growth to slow this year, they see few risks on the horizon that are large enough to tip the economy over the edge.
“We had a near miss on a recession, but we didn’t have one last year,” said Joe Brusuelas, chief economist for RSM, a financial consulting firm. “We won’t have one this year. I think this is a good place for the economy to be.”“We had a near miss on a recession, but we didn’t have one last year,” said Joe Brusuelas, chief economist for RSM, a financial consulting firm. “We won’t have one this year. I think this is a good place for the economy to be.”