Looking for a Big Economic Bump? It’s Looking Less Likely
The big economic bounce that some experts have confidently predicted for later in the year may turn out to be only a small bump.
It is not that the economy is weakening, or that a recession is in the offing. Rather it appears as if the pace of growth in 2017 will not be much faster than it was last year, or the year before that.
So even as the Commerce Department on Friday offered an upward revision of the first-quarter growth rate — to 1.2 percent from the 0.7 percent cited last month — other forecasters were lowering their sights for the current quarter.
The expectations have eroded amid fears of lackluster consumer spending and orders for durable goods, and new data on Thursday that showed a larger-than-anticipated trade deficit in April.
Instead of 4.1 percent growth in the second quarter, the Federal Reserve Bank of Atlanta’s widely followed GDPNow model now calls for a 3.7 percent rate. And the New York Fed reduced its rival Nowcasting estimate slightly to 2.1 percent. In March, that forecast stood at 3 percent.
In other words, the so-called new normal — steady but not spectacular growth that never reaches escape velocity — is beginning to resemble the old normal.
“We’re still on track for a 2 percent growth economy, give or take a little, but not a 3 percent economy,” said Diane Swonk, a veteran independent economist in Chicago. “It may not sound like much, but the difference is important.”
In a $17 trillion economy, it is a difference of $170 billion per year, which has major implications for corporate profits, worker pay and even the federal government’s bottom line.
The budget proposal released this week by the Trump administration assumes growth of about 3 percent annually, and President Trump has talked about annual growth of 4 percent or even more.
Neither figure is realistic, given the country’s aging population, and low growth in productivity, Ms. Swonk said.
“Those two factors make for headwinds that are hard to overcome,” she said. Although the kind of annual gains that Mr. Trump has targeted were achieved in the mid-2000s and the late 1990s, the economy’s underlying potential is not as strong now than it was then.
“It’s like trying to use old road maps in a GPS world,” Ms. Swonk said. “We need to acknowledge that.”
Not that an annual expansion in output of around 2 percent is terrible. That has been the average over the course of the recent recovery, which began almost exactly eight years ago, and is close to what economists like Mike Gapen at Barclays expect for this year and next.
Typically, quarterly data is volatile, but in recent years, first-quarter growth estimates have been especially unpredictable. This year, as was true in 2014 and 2011, growth appears to have been very weak in the first quarter. Experts expect a rebound in subsequent quarters in 2017, as happened in those previous years.
Early this year, output was also reduced slightly by warm temperatures in many parts of the United States, slowing demand for energy from utilities.
One key indicator for the current quarter will come on Thursday, when the latest monthly data for auto sales is released. Slightly lower car sales reduced growth by about 0.4 percentage points in the first quarter, according to Mr. Gapen.
On an annual basis, demand for cars has been running just over 17 million. If the number sinks below that threshold, expectations may have to be adjusted downward again for the second quarter, which ends on June 30.
On the other hand, Mr. Gapen noted that Asia, Europe and other markets are finally growing in sync with the United States, rather than there being rotating global weak spots.
“We don’t have a problem child,” he said. “In previous years, it was the fiscal cliff in the U.S., or debt fears in Europe or a hard landing in China. Global growth is more synchronized, without any individual pillars showing weakness.”