Since the election the consensus story line for the U.S. economy has been the status quo for now, with upside later this year and in 2018 as more business friendly policy takes hold. New data in late March and early April suggest that some caution may be in order. But not yet enough to alter our baseline forecast.
The third release of data for final quarter 2016 was little changed. Growth in real GDP was raised to 2.1% from 1.9%, due to higher estimates for consumption and for inventory accumulation. These were partly offset by a significant downward revision to intellectual property investment and a slightly larger estimated trade deficit. None of this changed the basic picture of the economy as 2017 began – overall growth at about 2%, propelled mainly by strong consumer spending, with weakness in each of the other sectors (business investment, government spending, and trade).
Prior to the last couple of weeks, monthly data were suggesting a positive turn for the economy. In particular, business sector indicators were sending signals of optimism, while the household sector was at least holding its own. But now there is at least a hint of doubt on both fronts.
On the business side March readings for both ISM indexes fell slightly, although they remain at high levels. As in January, industrial production was held down by weather related weakness in the utilities sector, but both manufacturing and mining registered strong gains. New orders for non-defense capital goods excluding aircraft (a crude proxy for business investment) fell in February after a weak gain in January.
Household sector data were also mixed. Adjusted for inflation consumption fell in both January and February. Even so, consumption has outpaced disposable income over the past six months. Auto sales were also down in January and February and then added a substantial drop in March. However, consumer sentiment and housing starts both registered large March increases.
On the positive side, the international sector seems to be a little improved. Estimates for European growth, in particular have been going up.
Finally, the labor market sparkled in March and also laid an egg. The sparkle was in the household survey, which saw the unemployment rate decline to just 4.5%, its lowest reading in nearly a decade. And this came with a solid increase in the labor force. The household survey measure of employment has surged an average 459 thousand per month so far this year. The egg came in the establishment survey where payroll employment in March rose by only 98 thousand, compounded by downward revisions to both January and February. Some of this was weather related, and it does bring the employment figure more in line with the longer-term trend in labor force growth, but it is still a little disconcerting.
Overall, as can be seen in the chart, the new and revised data have had only a small impact on our forecast relative to a month ago. We expect growth in the first half of this year to average just above 2.4%, followed by slightly over 2.2% through the remainder of the forecast period. Growth in the just completed first quarter is now put at 2.2%. This is a little over 0.2% below our month ago outlook, with all of the change coming from a reduced estimate for consumer spending.
Our updated forecast represents a continuation of the recovery norm of growth a little above 2%. We continue to believe that there is some potential for higher growth from regulatory adjustment, tax reform, and infrastructure investment if they are properly done. The problem is in the doing. Not all regulation is bad and not all deregulation is good. The trick is to not toss the baby with the bath water. It is a hard trick to get right. Taxes and infrastructure both require legislation, about which the example of the Obamacare repeal/replace does not engender confidence. With no evidence of bipartisanship, and lots of fractures in the GOP a path to success will require raising the art of the deal to unheard of levels.