Economic Insights - May 2017

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The U.S. economy continues to show increased signs of life as we transition from the era-of-Obama to the era-of-Trump.  Measures of consumer and business confidence have performed much better than before the election.  But where the economic rubber hits the road, in terms of actual production “the sizzle” has gotten way ahead of “the steak.”

If you’ve been a long-time subscriber to Business Briefings, you know that we expect the kinds of tax, regulatory, and spending policies being advanced by the administration to unleash a secular boom that will last into the 2030s.  However, as of this writing, key enabling legislation is still tied up in Congress and executive branch regulatory changes are just beginning to be felt.  Consequently, businesses and consumers are hesitant to makes big commitments until the specifics are nailed down.

As a result, when all is said and done, it looks like real GDP growth for the first quarter will clock-in at an annual rate as low as 1.5 percent.  This is slower than the recovery’s average, but consistent with the first quarter weakness we’ve seen over the past several years.

Here is how we got to each of the five components of our 1.5 percent forecast.

  1. Consumption: Automakers reported car and light truck sales dropped at a 17.2 percent annual rate in the first quarter. We expect sales to rebound in the second quarter, but the peak in auto sales for this cycle is probably behind us. “Real” inflation-adjusted retail sales outside of the auto sector grew at a 3.1 percent rate in the first quarter, but growth in services was weak, in part due to above-normal temperatures in January and February that held down utilities.  Our models suggest real personal consumption of goods and services, combined, grew at a 1 percent annual rate in the first quarter, contributing 0.5 points to the real GDP growth rate (That’s the result of multiplying 1 percent times the consumption share of GDP, which is 69 percent, to get 0.7 percent).
  2. Business Investment was hitting on all cylinders in the first quarter, with roughly 5 percent growth in equipment and commercial construction, as well as R&D. That should add 0.6 points to the real GDP growth rate, the most...

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