America’s economy performed worse than expected in the first three months of this year, government figures suggested yesterday, providing a setback to President Trump’s ambitious growth plans.
Gross domestic product (GDP) growth was downgraded unexpectedly to 2 per cent annualised from 2.2 per cent in a report by the US Department of Commerce.
GDP is the value of all goods and services produced in an economy, adjusted for inflation, and measuring its growth is a key indicator of how well an economy is performing.
Mr Trump has promised to accelerate growth to levels not seen since Ronald Reagan was president. Mr Reagan presided over an average annual growth rate of 3.5 per cent.
At the start of the year Mr Trump slashed corporate and personal taxes, as Mr Reagan did. He has also vowed to cut trade deficits with other countries to protect jobs. This has brought the US to the brink of a trade war with threats of tariffs on imports of goods from allies and enemies alike.
The downgrade meant that the annualised rate of growth fell by 0.9 percentage points between the fourth quarter of 2017 and the first quarter of 2018. A drop in consumer spending growth was the main driver of the decline, falling from 4 per cent to 0.9 per cent over the period. Consumer spending is important because it powers two thirds of the economy.
Pablo Shah, an economist at the Centre for Economics and Business Research, said that the economy was “in a less sanguine state than many had previously assumed”, with the downgrade highlighting that “the US is not immune from the effects of higher interest rates and an overall cooling of the global economy”.
He added: “That being said, low unemployment should support consumer spending in the coming months while the tax cuts will boost business investment.”
Mr Shah said that the likelihood of a full-blown trade war has risen in the past few months, which posed a risk to growth. Higher import tariffs would inevitably feed into prices, putting a squeeze on household budgets and weighing on consumer spending in the medium term.
The commerce department initially put first-quarter growth at 2.3 per cent in its first of three estimates, with yesterday’s being the last. Growth in the fourth quarter of last year was 2.9 per cent annualised.
Despite the downgrades, economists expect a strong performance from the economy in the next quarter. Macroeconomic Advisers, a forecaster, has projected second-quarter growth of 5.3 per cent annualised, while the Atlanta Federal Reserve has projected growth of 4.5 per cent.
A shrinking trade deficit could provide impetus for second-quarter growth. On Wednesday, the commerce department said that the goods trade deficit shrank by 3.7 per cent in May compared with the month before, with exports climbing by 2.1 per cent.
Daniel Silver, an economist at JP Morgan, said: “The nominal goods deficit has now narrowed for three straight months following seven consecutive months of widening”, which will “make a significant contribution” to second-quarter growth.
The commerce department is due to release its first estimate of second-quarter growth on July 27.
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