Another Bad First Quarter for the US Economy

Once again, the United States economy has started off a year on the wrong foot, with a sluggish start to 2017.  Going into this year, expectations had been that the US economy would pick up steam over the course of the year, and it was not a major surprise that the year started slowly for the world’s largest economy.  Of course, President Donald Trump’s promise to bring 4% GDP growth back to the United States always looked a little optimistic, especially so early in his term, but nevertheless, the results for the first quarter were largely disappointing.  Just a few weeks ago, a number of economists were talking about a more robust global economy in early 2017, particularly after China’s growth rate exceeded expectations during that period.  However, recent data, including that from the US, confirms our concerns that worldwide growth will remain relatively sluggish this year, following five years of steady, if unspectacular growth for the global economy.

During the first quarter of this year, initial results indicate that the United States economy expanded by just 0.7% on an annualized basis.  This was below the 1.0% to 1.2% growth that had been anticipated for the first quarter.  In recent years, US consumers have been the key drivers of growth and consumer confidence levels have been relatively high in recent months.  However, consumer spending growth came to a near complete halt in the first quarter of this year, and as consumer spending accounts for 71% of US GDP, this had a major impact on the results from the first quarter.  Likewise, business inventory building declined in the first three months of this year, further reducing the rate of economic growth.  Finally, a strong US dollar and uneven demand in many key export markets has presented the US economy with a difficult external situation.  In fact, only higher levels of business investment in early 2017 prevented an even greater slowdown for the US economy in the first quarter.  Altogether, these results were highly disappointing.

For a number of reasons, the United States economy struggles to grow in the first quarter of the year, and this is a trend that has been in place for much of the past decade.  In fact, the first quarters in a number of recent years (2011, 2014 and 2016) have seen growth rates that ended up being well below the rates recorded over the remainder of those years.  Since 2011, the average rate of economic growth in the first quarter in the United States has been just 0.9%.  In contrast, the average rate of growth in the US during this period over the final nine months of each year has been 2.4%.  In some years, these slow starts to the year were a direct result of particularly harsh winter weather conditions in northern areas of the United States.  However, this year, much of the US experienced one of its mildest first quarters in history, so blaming the US’ poor performance this year on the weather is not valid.  Some economists might blame these poor early results on lower rates of consumer spending in the wake of the previous quarters’ holiday seasons, while others will point out that economic growth in the first quarters of 2012 and 2013 were relatively high.  Regardless, it is clear that these slow starts are helping to prevent the US economy from returning to pre-financial-crisis levels of economic growth.

Looking ahead, the outlook for the United States economy is somewhat brighter and growth rates are forecast to rise over the course of this year.  One source of this growth is an expected recovery in consumer spending in the US in the coming months, as consumer confidence levels remain high and wage levels are rising after a prolonged period of stagnation.  Meanwhile, businesses are waiting to see if the Trump Administration will be able to move ahead with its proposed tax cuts and infrastructure investments, two factors that will play a major role in determining business and investor confidence levels in the US in the coming months.  Nevertheless, even if confidence levels rise across the board, achieving the 4% GDP growth called for by President Trump looks unrealistic, as the growth ceiling in the US has falling to somewhere around 3% due to slowing demographic growth and more limited export opportunities.  Overall, it appears that claims made in recent months that the US and global economies were on the verge of much higher growth were very premature, as the US and many other leading economies continue to face challenges that will prevent growth from returning to the levels of previous decades.