Overcoming Doubts, U.S. Economy Finds a Way Forward – The New York Times

Reports of the economic expansion’s death appear to have been greatly exaggerated.

The United States economy surged unexpectedly in the first quarter, the Commerce Department said Friday, allaying concern that financial-market volatility and a prolonged government shutdown would cause a slump.

That is good news for President Trump, who is counting on a strong economy to improve his chances for re-election. With investors and consumers alike showing renewed optimism, it is now all but certain that the decade-long expansion will become the longest on record later this year.

“The angst has settled, and the economy has come back,” said Ben Herzon, an economist with Macroeconomic Advisers, a forecasting firm. “I just can’t point to anything now that’s going to push us into recession.”

Gross domestic product, the broadest measure of goods and services produced in the economy, rose at a 3.2 percent annual rate in the first three months of the year. That is faster than most economists expected, and far better than the dour outlook of early this year, when many forecast that the figure could fall below 1 percent.

Friday’s figures are preliminary and will be revised at least twice in the months ahead.

Economists warned that the report was inflated by short-term factors and probably overstated the underlying pace of growth. Most anticipate a downshift as the year progresses.

Still, after a rough winter, the economy appears to have entered the spring fundamentally intact. Mr. Trump heralded the report on Friday, declaring the first-quarter growth figure “an incredible number.”

“We’re number-one economy right now in the world and it’s not even close,” he told reporters on his way to an event in Indianapolis.

Mr. Trump has often treated G.D.P. — along with the stock market, the trade deficit and other economic indicators — as a sort of scorecard for his presidency. Late last year, that scorecard wasn’t looking good, as growth slowed, the trade deficit ballooned and the stock market plunged.

Kevin Hassett, chairman of the president’s Council of Economic Advisers, acknowledged on Friday that there had been nervousness inside the White House that the partial federal government shutdown, which idled hundreds of thousands of federal workers and disrupted countless private businesses, could cause growth to stall in the first quarter. A sharp drop in consumer spending in December and a slowdown in job growth in February added to those fears.

Things have looked up since then, however. Consumer confidence rebounded quickly once the shutdown ended, and retail sales were strong in March. Hiring, too, has recovered. And the stock market has roared back, hitting record highs this week.

“Everything kind of turned around relatively quickly,” Mr. Hassett said. “The government reopened. A lot of uncertainty resolved. Equity markets started to get more confident, and then I think a lot of other people did too.”

Several factors explain the renewed optimism. Efforts by Chinese authorities to stabilize their slumping economy seem to be working, damping fears of a global economic slowdown. China and the United States also appear to be nearing a trade deal, reducing the risk of a new round of tariffs.

Perhaps the most important factor in the turnaround: the Federal Reserve. Markets began to stabilize, and stocks climbed again, after Jerome H. Powell, the Fed chairman, said in January that the central bank would be “patient” before raising interest rates again, after four increases in 2018.

Mr. Trump and his allies had been sharply critical of the Fed’s rate hikes. The president has said he will nominate one such ally, Stephen Moore, to fill an opening at the Fed. On Friday, Mr. Moore, an informal economic adviser to Mr. Trump, said the new growth figure made him feel “100 percent” vindicated in his criticisms.

“Thank God the Fed listened to me,” Mr. Moore said.

Mr. Powell has said the president’s criticisms won’t influence the bank’s decisions. Still, Mr. Trump has gotten what he wanted: When Fed policymakers meet next week, it is essentially a foregone conclusion that they will leave interest rates unchanged.

Fed officials indicated in March that they did not expect to raise rates again this year, in part because they forecast a growth slowdown from last year, and still-tame inflation. Friday’s report showed inflation slowing yet further in the first quarter.

Indeed, despite the robust G.D.P. figure, the underlying pace of economic growth has slowed since the middle of last year, when tax cuts and government spending briefly pushed the growth rate above 4 percent.

The most important components of the economy — consumer spending and business investment — were both weak in the first quarter, and the housing market contracted for the fifth quarter in a row. The strength in G.D.P. was partly the result of a surge in inventories and a drop in imports, both of which are likely to reverse in the second quarter.

For a better gauge of the economy’s health, analysts recommend focusing on a different number, which strips out trade and inventory effects as well as the impact of government spending. That measure, known as final private sales, came in at 1.3 percent, down from 2.6 percent in the fourth quarter of 2018 and the weakest showing since 2013.

“Domestic demand in the economy — investment, consumer spending — that was weak,” said Ellen Zentner, chief United States economist for Morgan Stanley.

Economists expect consumer spending to bounce back in the second quarter, as December’s market drop and January’s shutdown fade into memory. But businesses remain cautious, in part because they expect the economy to cool gradually as the effects of last year’s tax cuts and spending increases fade.

“If there’s weakness, it’s in the business-spending data,” said Michael Gapen, chief United States economist for Barclays. “It has yet to rebound in a meaningful way following the end of the government shutdown.”

Worthington Industries, an Ohio-based metals manufacturer, has seen no sign of a slowdown from its domestic customers, said Andy Rose, the company’s president. Still, spending isn’t rising as quickly as it did early in the recovery, and slower growth in China and other countries has hurt sales overseas, while Mr. Trump’s steel tariffs have driven up costs.

“We’re not seeing a drop-off, but I think the challenge for a lot of U.S. companies right now is to find where the next leg up is going to come from,” Mr. Rose said. “How are we going to drive earnings growth going forward if we’re not going to see a big increase in demand?”

That means companies are looking for other ways to improve profitability, including cutting costs.

“Cost cutting certainly is a late-cycle exercise,” Mr. Rose said. “Labor costs are going up. You have no choice but to try to save costs where you can.”

That caution may reflect nervousness about how long the economy’s run of good fortune can last. The Great Recession officially ended in June 2009; in July, the expansion will officially become the longest on record.

Economists, however, say that expansions do not die of old age — there has to be a cause. And while they expect growth to slow this year, they see few risks on the horizon that are large enough to tip the economy over the edge.

“We had a near miss on a recession, but we didn’t have one last year,” said Joe Brusuelas, chief economist for RSM, a financial consulting firm. “We won’t have one this year. I think this is a good place for the economy to be.”