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2017-05-03 06:32:58
Consumer spending is slowing, but investment is picking up
THE news that America s GDP growth slowed to 0.7% on an annualised basis in the
first quarter of 2017 is no real surprise, for two reasons. First, although
consumer and small business confidence have soared since Donald Trump won the
presidential election, most measures of actual economic activity have failed to
display the same vim (see article). Second, it is often the case that growth
sags in the first quarter of the year, despite recent efforts by statisticians
to purge the economic data of seasonality. Since 2010, excluding today s
release, first-quarter GDP growth has averaged just 1.1%, compared with 2.5% at
other times in the year. Judged against that benchmark, the latest data are
only a little disappointing.
The more interesting story is a shift in the composition of growth. Consumers
have driven most of the economy s spending growth since the end of 2015. But
consumption has now slowed abruptly (see chart). For that, blame sales of
durable goods. Falling motor vehicle sales alone have taken almost half a
percentage point off the growth rate. Weak sales of durable goods would usually
signal a hesitant consumer. That makes the contrast between what consumers are
doing and what they are saying all the more puzzling. Perhaps politics is
muddying the waters. The University of Michigan reports a very pessimistic
economic outlook among Democrats and a very optimistic outlook among
Republicans . The economic costs of half the country despairing might outweigh
the benefits of the other half rejoicing.
Fortunately, firms have stepped in to take up some of the slack left by
consumers. Non-residential fixed investment grew at a stonking 9.4% annualised
rate, the highest since 2013. That will please those who had begun to wonder if
firms would ever start investing again (see article). It is tempting to argue
that Mr Trump has unleashed animal spirits in boardrooms across the country.
Investment growth might even portend an expansion in the capacity of the
economy to supply growth, leading to higher trend growth in the years ahead,
just as Mr Trump has promised. Yet over a third of the investment recovery
reflects a rebound in the oil and gas industry, which, following a recovery of
the oil price during 2016, is opening and re-opening rigs. Growth in other
sorts of investment was more modest. There is no boom, for instance, in
research and development spending.
Where next for the economy? Expect the second quarter to produce healthier
data, as it usually does. The crucial question is whether high confidence ever
crystallises into a boom. It seems unlikely. The threadbare tax plan the
administration released this week does not look like a first step towards the
kind of comprehensive, bipartisan reform that could grease the wheels of the
economy. It will need to change dramatically to attract any Democratic support
in the Senate. If it does not, Republicans may choose instead to cut corporate
tax rates temporarily, which they can do without Democrats. That would not do
much for long-term investment incentives. Cutting taxes for individuals might
encourage spending, but that would probably force the Federal Reserve to raise
interest rates more quickly to see off inflation. Whatever the administration
promises, the most likely outcome is that the economy remains hewed to its
current trajectory of about 2% annual growth.