U.S. Economy Slows, Denying Trump 3% Talking Point

on Jul28
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The American economy is slowing, dragged down by trade tensions and weak growth overseas. But there are few signs that the decade-long expansion is on the verge of stalling out.

Gross domestic product, the broadest measure of goods and services produced in the economy, rose at a 2.1 percent annual rate in the second quarter, according to preliminary data released by the Commerce Department on Friday.

That is significantly lower than the 3.1 percent growth rate in the first quarter. And it falls far short of the 3 percent target that President Trump has repeatedly promised. Data revisions released Friday wiped away what had been a prized talking point for the White House: G.D.P. grew 2.5 percent for all of 2018, down from the 3 percent previously reported.

Fed officials have said repeatedly that Mr. Trump’s comments will not affect their decisions. Still, they are expected to cut interest rates at their meeting next week to try to prevent a more significant slowdown.

But while a cut is all but certain, Friday’s report might actually weaken the case for further stimulus later this year — something that investors have been anticipating but that Fed officials have not promised. Inflation, which had been running below the bank’s 2 percent target, picked up in the second quarter: Consumer prices rose at a 2.3 percent rate, or 1.8 percent excluding the volatile food and energy components. The report also showed that final demand — a measure of underlying growth that strips out some of the most volatile components — accelerated this spring.

The big quarter-to-quarter swings in the growth data are almost certainly exaggerated. The larger trend shows that the economy has cooled since last year, when tax cuts and government spending gave growth a temporary jolt. But the strong job market and robust consumer spending are keeping the recovery on track, even as various forces — foreign and domestic — threaten to knock it off course.

Still, on Friday, the S&P 500-stock index and the Nasdaq composite index closed at new highs after the G.D.P. report was released.

“It’s a good economy, but it’s got fragilities in it,” said Diane Swonk, chief economist for the accounting firm Grant Thornton. “You’d expect to feel more euphoria and more underlying strength, and instead what we’re seeing is fault lines.”

Consumer spending is the bedrock of the economy and has been resilient throughout the recovery. So it was a worrying sign when spending slumped in late 2018 and early 2019, dragged down by stock market volatility, a prolonged government shutdown and harsh winter weather.

But consumer spending roared back in the spring, rising at a 4.3 percent rate. Government spending, which picked up in the second quarter after being depressed by the shutdown, also helped lift growth.

Unfortunately, other parts of the economy look much weaker. Residential investment, which includes housing construction, declined for the sixth consecutive quarter. Business investment also declined and exports slumped as manufacturers, in particular, were battered by tariffs and slowing demand from overseas.

Meta Fab, a contract manufacturer outside Portland, Ore., has had strong sales growth in recent years, enough that it finally went ahead with a long-delayed expansion project. But now, just as its new 21,000-foot facility is nearing completion, the company is seeing sales slow, said Tony Varela, a manager there.

“Does it give us any pause?” Mr. Varela said. “Absolutely.”

Mr. Varela said it is hard to know for sure what is behind the drop-off in business, which has hit in just the last couple of months. His company’s costs increased when Mr. Trump imposed tariffs on steel and aluminum imports early in his term. The company largely passed those on to its customers in the form of higher prices, which might be hurting its business, Mr. Varela said.

Meta Fab originally planned to spend $1 million on new equipment for the facility, but it paused those plans when costs rose — a decision Mr. Varela is glad of now. Other companies are also taking a cautious approach. At a recent industry gathering, human resources officers told Mr. Varela that their companies were putting the brakes on hiring.

“It was a pretty resounding that every one of the H.R. managers has actually frozen any new hiring,” he said.

If that caution spreads, it will eventually affect consumers as well, said Ellen Zentner, chief United States economist for Morgan Stanley.

“There’s nothing that I can point to about the consumer and say I’m worried,” she said. “But how long can business investment remain this sluggish without spilling over into jobs and the consumer?”

Already, there are signs that consumers are keeping a wary eye on the state of the economy. Recent confidence surveys have found that people feel good about the economy now but are more nervous about the future.

The second quarter of this year was the 10th anniversary of the end of the Great Recession. Assuming another downturn hasn’t already begun, this is now the longest expansion on record.

But while the recovery has been durable, it has not been particularly strong. Wage growth has been anemic for much of the past decade, and income gains have gone disproportionately to the richest households. Parts of the country that suffered the most during the recession have in many cases fallen further behind since it ended.

Beef ‘O’ Brady’s, a Tampa-based chain of sports bars, has seen traffic slow in many locations in recent months. Chris Elliott, the company’s chief executive, attributed the decline in part to increased competition. But he also said it reflected caution from consumers, particularly in the smaller towns where many of its restaurants are. That has forced the company to focus on keeping prices low.

“What I find interesting is that with the economy as good as it is, and as many people employed as they are, how focused the restaurant consumer is on value,” Mr. Elliott said. “There are a lot of people in our economy that are still not doing that great.”

There are some signs that the record expansion could be nearing its end. Some forecasting models, particularly those based on the market for government bonds, have been flashing warning signs. And surveys show that economists think the risk of a recession in 2020 has been gradually rising.

“Obviously, the headwinds are increasing,” said Joe Brusuelas, chief economist for RSM, a financial consulting firm. Europe is close to a recession or perhaps already in one. A trade deal with China looks to be months away at best. A flare-up in the trade war could be enough to cause a recession, he said.

On the other hand, this week’s budget deal between the Trump administration and Congress eased the risk of another government shutdown or a standoff over the debt ceiling. And if the United States and China were to reach a deal this fall, the expansion could get a new life, Mr. Brusuelas said.

“Once that uncertainty is off the table, you’ll see a release of demand,” he said.

Last year was one of the best years of the recovery — but it wasn’t as good as it appeared initially.

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