US GDP Falls Below Expectations in Fourth Quarter After Decline in Exports

Economic Growth in the United States in the final quarter of 2016 disappointed according to data released on Friday, January 27.

Economists had been expected a mean lift of 2.2% but in the end, the economy flagged in the final stages of the year, rising by only 1.9%.

Despite a mega 3.5% rise in Q3, the slow start to the year meant that data for the whole of 2016 only showed a 1.6% rise, the lowest since 2011.

The main reason for the slower 1.9% growth in Q4 was a negative fall in Exports.

The decline may be as a result of the stronger Dollar which has rendered US exports less competitive.

The data will no doubt increase Donald Trump’s desire to fight the imbalance between imports and exports and perhaps also the appreciating Dollar.

Dr. Harm Bandholtz of Unicredit sees the data supporting a lurch to a protectionist stance.

“In the current political environment, we should not be too surprised if the sizeable drag from net exports at the end of the year (without mentioning the rise in 3Q16) will be used as another reason to justify a more protectionist stance.” Said Bandholtz in response to the data.

Lloyd’s Commercial Banking’s rapid response team saw the data as impacting on the Federal Reserve’s outlook at their next meeting, tempering expectations that the Federal Reserve will raise interest rates in the near future.

“It will not have a significant impact on next week’s Fed policy meeting when policy was always expected to be unchanged. It may, however, mean that the Fed will sound less upbeat about recent economic developments than would have been the case if the data had matched expectations,” said Lloyds.

“In particular, Fed policymakers may be tempted to note that as the weakness was due to international trade rather than domestic demand, the figures in part reflect an adverse impact from the strong US dollar,” they added.

Some commentators dismissed the shortfall as inconsequential within the bigger picture of US economic growth.

“Despite the sub-2% print, there are still reasons to believe that momentum in the economy remained healthy heading into 2017,” said CIBC’s Royce Mendes.

The data poses a currency problem for Donald Trump.

If he continues on his current policy trajectory in which most policies are Dollar positive including, the border tax, infrastructure spending, lower corporate tax, the offshore repatriation holiday and infrastructure spending, the Dollar will get stronger and stronger.

Unfortunately, this is likely to work against his best intentions for balancing the trade deficit by promoting US exports against US imports, as it will make US exports unaffordable and imports attractively cheaper.

Trump may well attempt to offset Dollar strength as he becomes aware of its deleterious impact.