U.S. Growth Accelerates, but Remains Short of Pace Promised by Trump

U.S. Growth Accelerates, but Remains Short of Pace Promised by Trump

- in World Biz

It also suggests that policy makers at the Federal Reserve will stick with their plan to gradually raise interest rates while shrinking the central bank’s balance sheet.

But the expansion camouflages some more profound shifts just under the economy’s surface.

Sectors like technology, health care and banking are thriving, even as industries like retail shed jobs.

And while the 4.4 percent unemployment rate is the lowest in a decade, wage growth remains frustratingly slow, and the fortunes of college-educated workers have diverged sharply from those with a high school diploma or less.

The stock market has also been soaring and the housing market is similarly robust in many parts of the country, especially in coastal areas like New York, Washington, San Francisco and Boston.

In the latest quarter, the economy benefited from steady consumer spending and an improving trade balance, while less robust state and local spending, along with slower inventory growth, worked as headwinds. Demand from shoppers for durable goods like automobiles, appliances and furniture contributed more than a full percentage point to growth.

Another bright spot lately has been the dollar’s decline against other currencies, especially the euro, which makes American exports more competitive overseas.

This week, the government also reported positive figures on orders for durable goods in June and a slightly more favorable trade balance.

Real Economic Growth

The dollar’s softness benefits American companies with sales abroad, as those foreign revenues are translated into dollars.

Diane Swonk, an independent economist in Chicago, cited impressive earnings reports from McDonald’s and Caterpillar recently, and said currency gains should serve as a tailwind for corporate profits later this year. The dollar has declined as other economies, especially those in Europe, have been showing signs of life, even as expectations for the American economy have cooled this year.

Just a few months ago, economists were expecting a strong rebound for the second quarter, with the consensus in May calling for 3.7 percent growth. There was talk of a “Trump Bump” as consumer and business sentiment improved.

Those hopes came down to earth, however, amid moderate spending by consumers, which accounts for roughly two-thirds of all economic activity.

And with deep divisions on Capitol Hill between Republicans and Democrats, as well as within the Republican majority itself — underscored early Friday by the Senate rejection of a health care bill — hopes have faded for the kind of big infrastructure program or comprehensive tax reform Mr. Trump has promised.

“At most we are expecting a slight cut in corporate tax rates next year, not big cuts,” Ms. Swonk said. “It won’t be the kind of sweeping reform we need.”

“The infighting both within the White House and both political parties exceeds the partisan gridlock we’ve become accustomed to,” she added. “Infrastructure spending seems to have fallen off the radar screen.”

In the second half of the year, economists like Michael Gapen of Barclays are predicting growth will remain in a range of 2 percent to 2.5 percent. “The economy remains in a modest growth path, and last quarter was driven by gains in household and business spending,” Mr. Gapen said.

“The surprise came in the area of trade, where it looks like solid growth outside the U.S. and a weaker dollar boosted exports,” Mr. Gapen added. “This is a turnaround from last year, when a stronger dollar was a drag on growth.”

The figure released on Friday is the first of three estimates that the Commerce Department will provide on growth in April, May and June. The final number could be revised higher or lower, depending on factors like consumer spending, business investment, factory orders and imports and exports.

The White House has said that its long-term target for growth is 4 percent, and Mr. Trump has repeatedly said that the economy could grow faster if regulations were rolled back and trade policies were toughened to encourage American companies to manufacture more of their products in the United States.

But many economists say that goal is unrealistic, given fundamental factors like an aging population and the retirement of the baby boomers, along with years of slow productivity gains.

The last time annual economic growth topped 4 percent was in 2000, at the end of the tech-fueled boom of the late-1990s. Since then, the American economy’s best annual performance was in 2005, just before the bursting of the housing bubble, when annual growth was 3.3 percent.

“We could grow slightly faster than we are now, if you had comprehensive tax reform and a 10-year infrastructure spending program,” Mr. Gapen said. “That could get us to 2.5 percent growth per year or slightly better. But 4 percent is highly unlikely.”

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