The Commerce Department released estimates Friday showing that the economy is growing more slowly than it has in years.
For the first quarter of 2017, it grew a measly 0.7 percent, the worst growth since mid-2014. Economists had been hoping that sluggish economic growth would start to pick up by now as more people find work and wages increase, plus an optimism boost from the Trump administration’s promise to cut taxes. Two months ago, they’d predicted a slight uptick to 2 percent growth.
The main reason for the decline seems to be a drop in consumer spending. Retail and automobile sales were weaker than predicted. Even so, economists say this is just a blip, and that it doesn’t represent a long-term trend. They’re still pretty optimistic that in the next quarter the economy will be growing by 2 percent per year.
“The economy is looking good from every other indicator,” says Aparna Mathur, an economist at the American Enterprise Institute. “We are getting all the right signals about investment, and in general people are feeling more confident.”
Rising GDP is a key indicator of the health of a country's economy, guiding investment and business decisions across the globe. A growing economy generally means that wages are rising and prosperity improves for everyone. (Though in recent years economists have argued that GDP is not an accurate measure of economic growth.) For comparison’s sake, during the postwar boom years, the American economy was growing up to 8 percent per year. At the end of 2016, the economy only grew 2.1 percent.
During his campaign, President Donald Trump promised to return growth to a whopping 4 percent. He’s since tempered his outlook, though his administration still believes that it can reach 3 percent sustained annual growth.
The 0.7 percent doesn’t bode well for Trump, though it could help him persuade Congress to take measures to boost short-term growth, such as cutting taxes and passing an infrastructure bill. In reality, though, the government can only do so much to grow the economy.
Here are some reasons the economy has hardly expanded this year.
1) People didn’t buy as many cars
Americans did not buy as many cars this year as they did during the first months of last year. Rising sales in the auto industry have helped the economy recover from the recession, with people feeling optimistic about the economy and splurging on a new ride.
According to the Economic Policy Institute:
Car sales had been very strong through 2016, so some slowing was predictable. There may be a further drop in the next few quarters due to a glut of used cars. This stems in part from subprime loans going bad and the cars being repossessed. As a result, weaker car sales could be a modest drag on growth through much of the year.
So many Americans have been buying cars in recent years that economists expected that to change at some point. After all, it’s not the kind of purchase people will make over and over, year after year.
2) Retailers overstocked last year
Consumer optimism was so high at the end of the year that retailers bought a lot of inventory, expecting Americans to spend way more money than they actually did. Because consumers didn’t spend as much money as expected, they didn’t need to buy more inventory.
The drop in spending was stark, with companies producing only $10 billion so far this year, compared to $50 billion at the end of the year. “This is a pretty regular process: When businesses accumulate too much, the produce less the next quarter,” says Barry Bosworth, a Brookings economist.
Businesses will probably start refilling their inventories now, he says, which will boost growth next quarter.
3) The dollar keeps getting more valuable
The value of the dollar has been rising, making American products more expensive for other countries to buy. From about mid-2011 to mid-2014, the value of the dollar increased 9 percent compared to global currencies. In the past two years, it’s jumped 20 percent higher.
There are many reasons for this. Investors across the globe are seeing a steady economic recovery in the United States and pouring their money into the country. The uncertainty of Brexit also led to a flurry of money movement to the more stable US economy.
“The high exchange rate is beginning to hurt trade, we got no growth in trade,” says Bosworth.
Such weak economic growth won’t be something Trump will show off at his rally in Pennsylvania on Saturday, which marks his 100 days in office. But it may help him persuade Congress to move more quickly on tax reform.