Shakin’ My Head

Real GDP rose at a 1.9% annual rate in the initial estimate for 4Q16, with the headline growth figure held down by a wider trade deficit. That does not mean that foreign trade is a drag on the U.S. economy. President Trump has inherited an economy that is in good shape. However, the federal budget situation, manageable right now, is set to become more troublesome in the years ahead – and that is before tax cuts and any additional spending on defense and infrastructure.

Inventories and foreign trade account for more than their fair share of volatility in quarterly GDP figures. Private Domestic Final Purchases (PDFP), which exclude net exports and the change in inventories, is the best measure of underlying domestic demand. PDFP rose at a 2.8% annual rate in the advance estimate for 4Q16 (+2.4% y/y). Inventory growth picked up further, adding a full percentage point to headline GDP growth. Net exports subtracted 1.7 percentage points. Soybean exports (mostly going to Mexico and China) surged in 3Q16 and only partly unwound in 4Q16. Imports, which have a negative sign in the GDP calculation, rose at an 8.3% annual rate, subtracting 1.2 percentage points from GDP growth. That is a sign of strength in the domestic economy, not weakness.

Much has happened since the new administration has hit the ground. Rather than prioritizing the many things they want to accomplish, they will try to do everything at once. This leaves Washington observers struggling to keep up. There is a lot of confusion about how it all works. While some have teeth, most of the recently issued executive orders are merely guidelines for what President Trump wants Congress to do (for example, Congress has to allocate spending to build the wall).