U.S. GDP Growth Slows to a Crawl as Consumer Spending Cools

The U.S. economy barely expanded in the first quarter, as consumer spending slowed to multi-year lows in an apparent setback to President Trump’s plan to boost the economy.

Gross domestic product (GDP) expanded at an annual rate of 0.7% in the March quarter, the weakest in three years, the Commerce Department said in a preliminary estimate on Friday. The reading fell short of modest forecasts calling for a 1% increase.
The economy grew at a disappointing 2.1% annual pace in the fourth quarter.

Consumer spending, which accounts for more than two-thirds of economic output, expanded just 0.3% in the first quarter. That was the weakest since 2009. Although the milder winter weather was partly to blame for the slowdown, rising inflation also hit consumers’ wallets. Inflation, as measured by the consumer price index (CPI), averaged 2.4% on the quarter – the highest since 2011.[1]

The weak GDP added to skepticism over President Trump’s plan to grow the economy up to 4% annually. The Republican administration, which marks its 100th day in office on Saturday, has experienced multiple setbacks getting its agenda off the ground.

On Wednesday, White House officials presented a preliminary sketch of a proposed tax-cut plan that was billed as the largest in U.S. history.

“This is going to be the biggest tax cut and the largest tax reform in the history of our country and we are committed to seeing this through,” Secretary of State Steven Mnuchin said Wednesday in outlining the proposed reforms.

Under the new guidelines, the top corporate tax rate will be reduced by 20 percentage points to 15% and a one-time levy will be placed on the $2.6 trillion in corporate profits held overseas. The reforms would also adopt a territorial tax system, which means most international profits earned by U.S. companies would not be subject to domestic taxes.[2]

Personal income taxes will also be streamlined under the proposed plan by reducing the number of brackets from seven to three.

Though good for business, the plan will run into stiff opposition from congressional Democrats, who are no doubt wondering about how the cuts will impact the deficit. Analysts say the tax plan would result in a massive revenue shortfall that the administration believes can be filled by stronger economic growth. Given the current state of the economy, expecting such a large pickup in GDP growth is difficult to justify.

In its most recent projections, the Federal Reserve forecast GDP growth of 2.1% in 2017 and 2018, followed by 1.9% the year after that. Policymakers said the long-run average is likely to be 1.8%. Those estimates are around half of what Trump is banking on.[3]

[1] Reuters (April 28, 2017). “US first-quarter growth weakest in three years, as consumer spending falters.” CNBC.
[2] Sam Bourgi (April 26, 2017). “White House Announces “Biggest Tax Cut” in U.S. History.” Economic Calendar.
[3] Federal Open Market Committee (March 15, 2017). March 15, 2017: FOMC Projections materials.