Consumers are more confident. Stocks are up five percent since the start of the year. And from the president on down, there’s talk of a Trump bump.
The only problem: The boom is apparent everywhere except in the economic data.
It’s not that the economy is stalling—far from it. But with the first quarter ending on Friday, growth in the first three months of the Trump administration is looking much the way it did under President Barack Obama.
In fact, experts see the GDP in the quarter coming in at only about 1 percent, on an annualized basis—less than half the pace in the second half of 2016, and a far cry from President Donald J. Trump’s own 4-percent target. “There is a temporal disconnect,” said Ellen Zentner, chief US economist at Morgan Stanley. “There has been an incredible rise in sentiment, but the proof is in the pudding later.”
Zentner expects growth of 1 percent this quarter, and considers recent data “solid”, but added that the big gap between expectations and reality “creates discomfort for economists and monetary-policymakers.”
“The divergence is stunning,” she added, drawing a distinction between “soft data” like consumer confidence and “hard data” like retail sales.
The pattern continued this week, when the Conference Board reported on Tuesday that its index of consumer confidence in March rose to its highest since December 2000. More hard data is expected on Friday, when the Commerce Department releases new figures on personal income and spending in February.
Wall Street, which surged in the months after Trump’s unexpected victory on hopes of tax cuts and deregulation, is coming to grips with the fact that at least in the short term, the outlook remains restrained. The Dow Jones industrial average has dropped on nine out of the last 10 trading days, the longest stretch of losses since 2011, albeit for a total decline of only 1.4 percent.
One quarter is only a snapshot, and official government data on the GDP for the period will not be out for another month. What is more, the US economy is expected to pick up some speed later in the year, especially if the White House and Congress can agree on a package of promised tax cuts and new infrastructure spending.
The Federal Reserve raised interest rates this month and signaled two more rate increases later this year, indicating that the central bank is also in the faster-growth-around-the-corner camp.
Still, for all of 2017, the economy is expected to expand by roughly 2 percent, the rate of the recovery under Obama. The identical figures illustrate how much easier it is for a president to lift economic spirits, as opposed to actual growth rates.
If tax reform and other legislation in Washington suffer the same fate as the bid to roll back Obama’s health care overhaul did last week, Zentner said, the Trump bump “could be built like a house of cards that comes crumbling down.”
Part of the problem is that despite Trump’s Oval Office sessions with chief executives and the return of what the economist John Maynard Keynes termed “animal spirits”, corporate America is not investing heavily, at least so far, in new plants and equipment. At the same time, demand in many industries is growing only modestly, while a few sectors, like retail chains, are having to make painful adaptations to a rapidly evolving consumer landscape.
Retail stores are top customers for Valdese Weavers, a century-old maker of high-end fabrics nestled in the Blue Ridge Mountains of North Carolina, but Michael Shelton isn’t complaining.
“Business is better for us than it should be, because growth has been relatively flat for many of our customers,” said Shelton, Valdese’s chief executive. “We’ve been able to find a few pockets of new business, so growth is in the low single digits. It’s nothing robust, but at least we’re up for the year and we’re happy about that.”
“I don’t think politics or the election has affected our outlook,” Shelton said. “While many of our customers have seen a Trump bump in terms of their stock price, the industry hasn’t seen an effect on retail traffic.” One additional factor holding back economic growth nationally—and in Burke County, North Carolina, where Valdese is based—is the proportion of Americans now in the labor force.
Although unemployment in Burke County is half a percentage point higher than the national average, Shelton says finding workers with the technical skills Valdese needs is difficult.
“We could train an undereducated person in the past,” he said. “But the textile industry has changed, and we need a higher level of competence in computers and math for specific skills.”
As a result, only 56 percent of Burke County’s working-age adults are in the labor force, well below the already-anemic national average of 63 percent. At the same time, only 17.2 percent of the county’s residents have a bachelor’s degree, half the national average, which holds back income growth.
There is still a chance that first-quarter growth could surprise the doubters. Although the widely followed GDPNow model of the Federal Reserve Bank of Atlanta calls for a 1-percent expansion rate in the first quarter, the New York Fed’s Nowcasting Report is looking at a 3-percent growth.
“The difference is larger than usual and is being driven by the fact that the New York Fed incorporates soft data into its tracking,” said Zentner of Morgan Stanley.
The government’s estimate of GDP is based on specific data points for economic factors, like monthly retail sales, inventories, trade and other hard data, which also count more heavily in the Atlanta Fed’s model.
Whoever is right, most longer-term forecasts estimate growth for all of this year and 2018 to be in a range of 2 percent to 2.5 percent—again, largely in line with the pattern of the last eight years.
“Sentiment has gotten stronger but business investment hasn’t accelerated,” said Michael Gapen, chief economist at Barclays. “To get it to translate to hard data, you’d need new policies, like tax cuts, tax reform and a major increase in infrastructure spending.”