Trump’s Economic Vows May Be Harder to Hit After a Slow 2016

Trump’s Economic Vows May Be Harder to Hit After a Slow 2016

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While Friday’s report will provide more support for Mr. Trump’s argument, the lackluster pace of economic growth may also complicate the new administration’s plans. Indeed, some of the headwinds in 2016 — like a widening trade deficit and cautious spending by businesses — could persist into 2017 and beyond.

In particular, lower exports and higher imports also hurt growth in the fourth quarter, which fell to an annual rate of 1.9 percent from 3.5 percent in the prior quarter, the Commerce Department said Friday.

In 2016, personal consumption — which accounts for a majority of economic activity — slowed from 2014 and 2015. In addition, the sharp plunge in oil prices over the same period prompted steep cuts in energy production and exploration, contributing to a drop in business investment.

All of this underscores why analysts say that Mr. Trump’s growth rate target of 4 percent is audacious at best and fanciful at worst, especially given broader factors like an aging population and the growth rate of 2 percent or so that has prevailed since the recovery began in 2009.

“It would defy gravity,” Diane Swonk, a veteran independent economist in Chicago, said. Four percent growth would require big gains in the size of the work force and productivity, but neither is in the offing, Ms. Swonk said, adding, “It’s simple math.”

At the same time, the Federal Reserve has signaled that it is ready to raise interest rates a few times this year, and a faster expansion would only accelerate the Fed’s plan to tighten monetary policy to head off inflation.

Whatever the growth trajectory is in 2017, Fed officials will have a tricky time navigating the political and economic currents under Mr. Trump. Not only did he criticize the Fed chairwoman, Janet L. Yellen, during the campaign, but his assessment of the current economy is more downbeat than the Fed’s.

One week into the Trump administration, there are many other economic wild cards for policy makers and private forecasters to contemplate, including the impact of congressional efforts to reshape the corporate tax code, trade tensions with Mexico and China, and the proposed repeal and replacement of the Affordable Care Act.

Tax cuts could open the way for new spending and investment. But more expensive imports from Mexico could be painful for many consumers, for example, while a trade war with China would hurt American companies like Apple, General Electric and Caterpillar.

What is more, although the Commerce Department report focused on the last three full months of Mr. Obama’s second term, anemic economic activity could add to the revenue shortfall the federal government will most likely face from the personal and corporate tax cuts Mr. Trump has discussed.

Economic Growth

The annual growth of the gross domestic product was 1.6 percent in 2016, the lowest level in five years.




Annual percentage change in

gross domestic product

Based on chained 2009 dollars

Annual percentage change in gross domestic product

Based on chained 2009 dollars


“It’s difficult to see how we would get to 4 percent growth given the current structure of the economy, especially demographics and productivity growth,” said Gus Faucher, deputy chief economist at PNC Financial Services in Pittsburgh. “That would be true no matter who is the president.”

The retirement of the baby boomers will limit the size of the labor force, he said, while productivity gains from technology are not expected to accelerate from the current level, as they did with the adoption of the internet or mobile phones in the 1990s.

Weak growth does strengthen arguments for a federal program to fortify the nation’s infrastructure — an approach Mr. Trump has advocated that could provide an economic stimulus.

Since Mr. Trump’s victory in November, many economists have been raising their projected growth rates for the latter half of 2017 and for 2018.

That is not necessarily because they feel Mr. Trump’s policies will prove beneficial in the long run. Instead, it is because the tax cuts and infrastructure investments he has called for could bolster the economy in the short term.

Mr. Faucher lifted his growth forecast to 2.4 percent in 2017 and 2.7 percent in 2018. Previously, he expected output to expand by 2.25 percent in each year.

“Tax cuts and infrastructure spending represent a much more expansionary fiscal policy than we’ve had in some time,” he said.

But Mr. Faucher cautioned that increasing the federal deficit, which stood at $587 billion in 2016, by hundreds of billions more in the coming years could increase interest rates, which were already moving higher.

Rates, including mortgage rates for home buyers, are already up more than half a percentage point since the election, on expectations of more borrowing and faster growth.

But in economics, as in life, everything cuts both ways. The rise in interest rates has also strengthened the dollar relative to other currencies.

While that has been good news for American tourists, a stronger currency is bad news for American exporters, with imports becoming cheaper while the price of American-made products abroad rises.

The prospect of a stronger dollar also makes it more difficult to achieve another of Mr. Trump’s economic goals: a revival of the American manufacturing sector. Manufacturers are more dependent on foreign sales than many other businesses, but a rising dollar makes their products less competitive overseas.

On Friday, the White House announced a manufacturing jobs initiative, naming chief executives like Andrew N. Liveris of Dow Chemical and Elon Musk of Tesla to the as part of the effort, along with labor leaders from the A.F.L.-C.I.O.

The dollar is rising on expectations of faster growth in the United States and because of the jump in domestic interest rates, which make American financial assets like bonds more appealing to global investors than lower-yielding debt in Europe and Asia.

“Mr. Trump can’t control the dollar, and that will be a big factor this year,” Mr. Faucher said. “Trade is likely to be a drag on growth.”

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