2017-01-27 06:06:09
Modest U.S. Growth at Year’s End May Reframe Policy Debate

The American economy finished 2016 on a soft note, the government reported Friday, expanding in the fourth quarter at an annual rate of 1.9 percent.

That is less than half the rate President Trump vowed he could deliver during the campaign — a promise repeated on the White House website — and the economy’s underlying weakness complicates the new administration’s plans.

The pace of economic expansion for all of 2016 wound up at 1.6 percent, the lowest annual rate in five years. It was below the 2.6 percent rate recorded in 2015.

While the Commerce Department report covered the last three full months of President Barack Obama’s second term in office, anemic growth could add to the revenue shortfall the federal government is likely to face from the personal and corporate tax cuts Mr. Trump has talked about.

At the same time, weak growth could bolster arguments for a federal program to fortify the nation’s infrastructure — an effort Mr. Trump has advocated that could provide an economic stimulus.

But Mr. Trump’s growth rate target of 4 percent is audacious at best, fanciful at worst, especially given the 2 percent or so growth that has prevailed in the years since the current recovery began in 2009.

What is more, the Federal Reserve has signaled that it is ready to raise interest rates a few times this year, and a faster rate of expansion would only accelerate the Fed’s plan to tighten monetary policy in order to head off inflation.

Before the fourth-quarter report Friday, experts had expected growth of just over 2 percent.

The numbers were complicated this time around by the after-effects of a surge in soybean exports in the third quarter of 2016, which lifted growth in the period to the highest level in three years.

Since the surprise victory of Mr. Trump in November, many economists have been raising their projected growth rates for the latter half of 2017 and for 2018.

That is not necessarily because they feel Mr. Trump policies will prove beneficial in the long run. Instead, it is because two of his proposals — tax cuts and infrastructure investments — could bolster the economy in the short term.

Gus Faucher, deputy chief economist at PNC Financial Services in Pittsburgh, lifted his growth forecast to 2.4 percent in 2017 and 2.7 percent in 2018. Previously, he expected output to expand by 2.25 percent in each year.

“Tax cuts and infrastructure spending represent a much more expansionary fiscal policy than we’ve had in some time,” he said.

But Mr. Faucher cautioned that increasing the federal deficit — which stood at $587 billion in 2016 — by hundreds of billions more in the coming years could push up interest rates, which were already moving higher.

Interest rates, including mortgage rates for home buyers, were already up more than half a percentage point since the election, on expectations of more borrowing and faster growth.

But in economics, as in life, everything cuts both ways. The rise in interest rates has also strengthened the dollar relative to other currencies.

While that has been good news for American tourists, a stronger currency is bad news for American exporters, especially manufacturers, since it makes imports cheaper while lifting the price of American-made products overseas.

“Mr. Trump can’t control the dollar, and that will be a big factor this year,” Mr. Faucher said. “Trade is likely to be a drag on growth.”