WASHINGTON – The U.S. economy entered 2017 with a solid head of steam, driven by consumer spending and a pickup in business investment. President Donald Trump could add to that momentum — or kill it, if trade tensions keep flaring.
Fourth-quarter figures released Friday showed how swings in trade can have big effects. Net exports subtracted 1.7 percentage points from the gross domestic product, the most since the second quarter of 2010. The wider trade deficit followed a spike in soybean shipments that boosted exports in the July-to-September period.
The drag from trade limited the increase in gross domestic product, the value of all goods and services produced, to an annualized rate of 1.9 percent, less than analysts projected. Continued gains in household purchases, the first advance in business-equipment spending in five quarters, and accumulation of inventories contributed to growth.
Trump threw U.S. relations with Mexico into turmoil this past week by demanding America’s southern neighbor pay for a border wall, pushing the nations closer to a trade war. Meanwhile, the president is calling for a more level playing field with China, in addition to having pulled the U.S. out of a proposed 12-nation Pacific Rim trade accord.
All of this comes on top of existing headwinds: a strong dollar, weak overseas markets and rising American appetites for imports that make it tough to shrink the deficit.
“The major thing we worry about is trade,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. “The trade deficit got a lot bigger last quarter. The biggest potential drag is tariffs and trade wars with Mexico and China, which could thwart the upward growth momentum as the economy goes through 2017.”
Mexican President Enrique Pena Nieto on Thursday canceled a visit to the White House planned for the coming week after Trump reinforced his demand for Mexico to pay for a barrier to stem illegal immigration. On Friday, Trump said he had a “friendly” hourlong phone call with Pena Nieto but said he will insist on renegotiating the economic relationship between the two countries. Pena Nieto said he and Trump agreed to stop publicly talking about who would pay for a wall, but the U.S. administration made no mention of such a deal in its version of a joint statement.
China and Mexico are America’s biggest and third-biggest trading partners. Canada ranks second.
The final three months of the year capped growth of 1.9 percent for 2016, near the average pace of the current expansion. The strong job market and optimism among consumers and companies for Trump’s proposed policies on lower taxes and fewer regulations are likely to keep growth humming along in 2017.
While trade is a big question mark, demand looks solid within the domestic economy.
Consumer spending, which accounts for about 70 percent of the economy, rose at a 2.5 percent pace last quarter, in line with projections and after the prior period’s 3 percent jump. Purchases added 1.7 percentage points to growth. Also on Friday, a University of Michigan survey for January showed the strongest sentiment among households in 13 years, signaling better prospects for spending in coming months.
To get a better sense of underlying domestic demand, economists look at final sales to domestic purchasers, which strip out inventories and exports, the two most volatile components of GDP. After adjusting for inflation, such sales grew 2.5 percent last quarter, the fastest since the third quarter of 2015.
With inherent strength in the economy and fiscal and regulatory policy changes likely to boost consumer spending and business investment, “There is good reason to believe that this year could finally be different,” Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, said in a note to clients.
He expects growth will accelerate to a range of 2.5 to 3 percent. While quarterly swings in the gap between exports and imports tend to be noisy, “the direction of the trade deficit in 2017 will be very interesting and loaded with political implications.”
Exports fell at a 4.3 percent pace last quarter, the biggest drop since early 2015, while imports jumped 8.3 percent, the most in two years.
Other parts of the economy are also showing improvement.
Business outlays on equipment rose 3.1 percent for the first gain in five quarters. Residential construction increased at a 10.2 percent annualized rate, following a 4.1 percent decline in the previous three months.
Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., also is concerned that while his near-to-medium-term view on the economy has turned considerably more optimistic, important risks and uncertainties could significantly alter the outlook.
“The biggest wild card is trade policy under the new administration,” Shapiro said in a note after the GDP report. “If protectionism is more bark than bite, then no harm, no foul. However, if significant protectionist policies are enacted, retaliation would likely occur and the consequent hit to global trade would weigh on growth and on business sentiment.”