30 Under 30 2020

U.S. Growth at Slowest Since 2016, Complicating Trump's Pitch

The US GDP grew at a 2.1% annual rate between October and December; the economy turned in a weaker annual showing than it did in 2017 and 2018

By Patricia Cohen
Published: Jan 31, 2020

econ growth_bgBoeing 737 MAX airplanes on the assembly line at the Boeing plant in Renton, Wash., on March 27, 2019. Boeing’s troubles with the airliner hurt economic output. (Ruth Fremson/The New York Times)

The government’s latest economic scorecard arrived on Thursday, offering fresh evidence that the economy continues to grow, but at a frustratingly slow pace.

As the nation heads toward a presidential election, the question is whether voters will view steady but unspectacular growth as a sign that President Donald Trump’s handling of the economy has succeeded or stumbled.

Gross domestic product, which measures the value of goods and services produced inside the United States, grew at a 2.1% annual rate between October and December, the same as the previous three months, according to preliminary data released by the Commerce Department. As for 2019 as a whole, the report shows that the economy turned in a weaker annual showing than it did in 2017 and 2018.

In previous decades, growth that consistently fell below 3% would have been seen as distressing. Now most economists — at least those outside the administration — see normal growth circling the 2% mark.

“In the bigger picture on 2019, growth was solid,” said Matthew Luzzetti, chief U.S. economist for Deutsche Bank Securities. But he warned that the headline figure masked some soft spots. Consumers pulled back on spending, and business investment declined for the third quarter in a row. A big chunk of the quarterly gain could also be attributed to an unusual and temporary plunge in imports.

The languor, in part, reflects a remarkable achievement — a maturing labor market, where the official jobless rate creeps along at half-century lows as the expansion heads toward its 11th anniversary. A hefty chunk of the population is also aging into retirement.

“Underneath what you’re seeing is slower domestic activity,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. “It’s just the natural state of things.”

Thursday’s report shows that trend is continuing.

“We’re seeing some loss of economic momentum as we exit 2019 and come into this year,” Bostjancic said.

Trump has maintained an enthusiastic bullishness even though the annual growth rate has fallen decidedly short of his promises of 3% or 4%.

At the World Economic Forum this month in Davos, Switzerland, he declared that “the United States is in the midst of an economic boom the likes of which the world has never seen before.”

After Thursday’s report showed that year-over-year growth slowed to 2.3% in 2019 from 2.5% the previous year, the White House posted a statement noting that GDP has exceeded expectations. It referred to projections that were issued in 2016 before Trump’s election.

The annual growth rate did surge past 3% in the second half of 2017 and in some of 2018, helped by hearty tax cuts and government spending. And it continued to sail ahead at the start of last year, reaching 3.1% between January and March.

But the stimulus effect faded, and that growth level now looks more like an aberration. The economy has not expanded by 3% or more in a full calendar year since 2005.

Trump has spread blame for the recent slowdown, reserving his harshest criticism for the Federal Reserve Bank, which raised benchmark interest rates between 2015 and 2018 before cutting rates three times last year.

“No. 1, the Fed was not good,” he said.

The president also mentioned the six-week strike at General Motors last fall and the continuing turmoil at Boeing, the nation’s largest aerospace manufacturer and largest manufacturing exporter, after accidents involving two of its 737 Max airplanes killed 346 people.

“With all of that, had we not done the big raise on interest, I think we would have been close to 4%,” Trump said.

Federal Reserve policymakers have declined to respond and maintained a wait-and-see approach on the economy. On Wednesday, they left benchmark interest rates unchanged.

The inflation rate has remained stubbornly below the Fed’s target of 2%. One measure reported on Thursday, the personal consumption expenditure index, was unexpectedly weak. Excluding the volatile categories of food and energy, the index increased just 1.3% on an annual basis.

The Commerce Department will revise the fourth-quarter results twice as more data come in. Other indicators, including the January jobs report next week, will offer insights into the year just begun — and whether subpar manufacturing, trade upheaval and other impediments to growth can be overcome.

Boeing’s troubles are taking a toll.
December has usually been a strong month for Boeing, with average sales of 234 airplanes over the past five years, Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics, noted in a newsletter. Last month, it sold just three. Strong sales of defense aircraft after Congress raised military spending offset the decline.

Still, Boeing’s halt in 737 Max production will continue to ripple throughout the economy in the coming year. This week, one of the airplane manufacturer’s suppliers, Arconic, said it expected to lose $400 million in Boeing sales and cut jobs. Another contractor, Spirit AeroSystems Holdings, recently announced that it was eliminating 2,800 jobs this month. Hundreds of other companies are also grappling to manage the fallout.

Analysts say they expect Boeing’s disrupted production to shave half a percentage point off GDP in the first three months of this year.

A shrinking trade deficit may not be a boon.
The Trump administration has made reducing the American trade deficit a goal, and it did shrink in the fourth quarter.

Economists, though, have warned that the deficit can fall for a variety of reasons, and not all of them are good.

When a nation buys more things from abroad than it sells — the definition of a trade deficit — it pushes down GDP.

A boom in manufacturing, for example, can reduce the deficit by pushing imported products out of the American market and feeding a surge in exports.

But the deficit can also fall because the pace of the American economy is slowing, making consumers less likely to buy imported goods and businesses less likely to invest. And that has been the situation in the United States, economists say.

“There is no evidence of those broader positive developments,” said Brad W. Setser, a senior fellow in international economics at the Council on Foreign Relations. “To the extent that tariffs have succeeded in bringing the trade deficit down, they have done so largely by reducing U.S. demand, not by raising U.S. production.”

Imports fell sharply in September after the United States imposed tariffs on China because some U.S. companies held off buying goods, hoping that the Trump administration might soon strike a trade deal that reduced or removed the tariffs.

As tensions with China cooled in December, imports revived. And with a Phase 1 trade deal now signed, they are expected to climb further in the months to come.

Many variables cloud the outlook.
Businesses are hesitant to invest when they are unsure of what’s ahead.

According to Ben Herzon, executive director of U.S. economics at Macroeconomic Advisers, a forecasting firm, research shows that the “level of investment spending recently has been about $100 billion lower than it would have had there been no uncertainty about trade policy.”

That suggests there is room for more investment if trade policy settles.

This week, Trump signed the new North American trade agreement with Canada and Mexico into law. But tariffs remain on two-thirds of Chinese imports. At the same time, trade frictions with Europe over tariffs, airplane subsidies, digital taxes and the World Trade Organization have ratcheted up.

Also unsettling is the outbreak and spread in China of a mysterious and deadly virus that has the potential to rattle investors, and slow growth in Asia.

On the domestic front, Trump’s impeachment trial in the Senate and the coming presidential election add another large dose of political volatility.

No matter who becomes the Democrats’ nominee, “we’re likely to have two candidates with very different views on tax, regulatory and trade policy,” said Luzzetti of Deutsche Bank. “Businesses don’t know which direction that’s going to go in, so they may hold back on spending projects.”

©2019 New York Times News Service

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