Better-than-expected growth, the ongoing strength in the job market and fresh stock market highs this week are allaying fears that a recession or severe downturn is on the horizon. The slowdown in Europe and China appears to have had little effect on the United States so far.
“The economy is not slowing nearly as much as people think,” said Neil Dutta, head of economics at RenMac Research. “A 3.2 percent pace cannot be sustained, but the Federal Reserve and markets have probably cut their growth estimates too far for this year.”
Many economists initially predicted anemic growth at the start of the year as the partial government shutdown and a rash of extremely cold weather caused many businesses and consumers to hit the pause button on big purchases, but forecasters raised their estimates to 2.3 percent as it became clear companies were restocking their shelves. Growth ended up coming in almost a full percentage point higher than expected, the best start to the year since 2015.
A debate is now underway about what will happen the rest of this year and early next year, a key moment when many Americans are likely to take stock of how the economy is doing ahead of the election.
Over half of the strong first-quarter growth was driven by a surge in inventories and U.S. exports to other nations, many economists pointed out, an unusual situation since consumer and business spending normally propels growth. A jump in state and local government spending also boosted growth by the biggest amount in three years.
“Businesses were building inventories like crazy. That is not going to last,” said Ben Herzon, executive director at Marcoeconomic Advisers. “The first-quarter number is overstating the strength of the economy.”
Trump has vowed he can get the U.S. economy growing at an annual pace of 3 percent — or better — for the next decade. By one growth calculation he achieved that goal last year after the tax cuts and additional government spending spurred more consumer and business spending. But whether the economy can sustain that pace is an open question.
As the president flew to Indiana to speak at a National Rifle Association conference, he hailed the economic news, saying it was “incredible" and “great,” and “we’re knocking it out of the park."
Most experts, including the Federal Reserve, which has been a frequent target of Trump’s ire, have been saying growth is likely to come in closer to 2 percent this year, more in line with growth in the Obama years. But some independent forecasters are moving their estimates toward 2.5 percent as they see an improving outlook.
The International Monetary Fund recently predicted growth would pick up in the second half of the year for the world economy and likely the United States, propelled by the expected resolution of the U.S.-China trade war and the Fed’s decision to hold off on raising interest rates.
The president’s top economic advisers say they are revising their forecasts even higher for the year after looking through the data. They believe growth would have been 3.5 percent in the first quarter without the shutdown and that consumption will pick up later this year.
“Right now we would be inclined to increase our forecasts. Not only was last year not a sugar high, but it appears the economy is accelerating,” said Kevin Hassett, head of Trump’s Council of Economic Advisers.
A key conundrum is that first quarter growth is typically the weakest of the year, but this year is likely to be different, experts say.
After a big buying spree in the winter, companies are unlikely to keep expanding their inventory this spring, meaning second-quarter growth could take a hit. The unusual jump in U.S. exports is also likely to be hard to sustain. If the trade deficit widens in the second quarter, that would also be a drag on growth.
Business spending, which the White House said the tax cuts would boost, came in at 2.7 percent, a modest pace with almost not spending on equipment or buildings. There’s hope that if Trump ends the trade war with China soon, businesses might be more eager to spend again.
“There’s no evidence that business investment growth has ratcheted up to a new higher level as a result of tax reform,” said Dean Maki, chief economist at Point72 Asset Management. “Still, it has been relatively steady.”
Hassett said the president’s top economic priority at the moment is closing trade deals with China and Europe and getting Congress to pass the U.S.-Mexico-Canada Agreement, the revised North American Free Trade Agreement deal.
U.S. consumers are likely to be the key factor in whether the economy has a normal, subpar or extraordinary year since consumer spending drives about 70 percent of growth. Spending on goods and services was relatively weak at the start of the year. While overall growth came in at 3.2 percent, final sales to U.S. purchasers, a measure of domestic demand, was 1.4 percent.
Americans sharply pulled back in spending at the end of last year, but there are signs they started buying again in March, which should create a spring bounce to keep the economy expanding at a decent pace. For the past several years this trend has played out with weaker spending in the first quarter and stronger spending in the spring and summer.
Wages, especially for lower-income Americans, are rising above 3 percent and faster than the cost of living as companies have to boost wages to attract and retain workers, and many states have increased their minimum wages. Consumer sentiment also remains high despite the ongoing drama in the White House.
Fifty-three percent of consumers reported an improvement in their personal finances in April, according to the latest University of Michigan Survey of Consumers released Friday, which is the highest average since 1999 and should help motivate Americans to keep spending.
Despite ongoing robust growth, inflation has remained below 2 percent in recent months and shows signs of moving lower, which should keep the economy from overheating and the Fed from raising interest rates any higher.
“It looks like the Goldilocks scenario of strong growth and benign inflation is still happening, much like the 1990s,” said Dutta, the economist at RenMac Research.