March 1, 2017

The Economic Situation, March 2017

Key materials

Do you remember Elvis’s 1971 hit, “Whole Lotta Shakin’ Goin’ On”? That rambunctious tune would be a good theme song for the new Trump administration. In just its first few weeks, the administration announced a score of proposed and major policy changes, including revising the Affordable Care Act, closing immigration from seven mainly Muslim countries, getting action started on the border wall, and initializing steps to remove parts of Dodd-Frank. With more change in the works, there is high uncertainty; and high uncertainty can lead to hesitancy and a bumpy GDP growth path. But of course, changes for the better can yield a pause that refreshes. We are still in the shakedown cruise, a bit too early to tell what the result may be.

I thought about this when the US Department of Commerce announced its first estimate for 2016’s fourth quarter GDP growth (not quite 2.0 percent). For an economy that historically—before the year 2000—produced 3.0 percent growth or better, a real growth rate of 1.9 percent looked pale. Our national economy is like a three-lane (3 percent) highway with one lane closed (2 percent). Indeed, if the 1.9 percent estimate holds, 2016’s GDP growth will come in at 1.6 percent, the weakest year since 2011. The slow growth data were confirmed by monthly industrial production numbers. They have been flat—no growth—since July.

Why the weakness? It wasn’t the consumer. Retail sales and consumption are rising apace. It was low net exports and capital investment. Weaker exports associated with an escalating dollar and very high global uncertainty took away 1.7 percentage points from the GDP growth estimate. The high global uncertainty level is shown in the accompanying chart that reflects data for 17 countries. Compare the high uncertainty of the most recent observations with the uncertainty registered foçr 9/11. Wow! Mountains compared to molehills. Extreme uncertainty yields postponed investment, delayed hires, and other let’s-wait-till-the-clouds-clear reactions that reduce GDP growth.

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