Americans increased spending in the first three months of 2017 by the smallest amount since 2009, marking the U.S. economy’s worst performance in three years. Terrible news, right?
What arguably matters more is what Americans spent their money on. Not necessarily how much. By that standard the first quarter was not so bad. Consumers mostly spent less on things they’d prefer not to spent money on: gasoline, winter heating bills, out-of-season clothing.
The government’s official scorecard for the U.S. economy, known as gross domestic product, doesn’t make any of these value judgments, of course. The latest report merely shows that consumer spending rose by a skimpy 0.3% in the first quarter.
That’s far below the 3.5% increase at the end of last year and the smallest advance since the last quarter of 2009, just as the U.S. was digging out of the Great Recession. Hence the skimpy 0.7% increase in growth in the first three months of 2017 during the early stages of the Trump presidency.
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Yet the details in the first quarter report — the devil is always in the details — tell a different story.
The biggest drop occurred in auto sales and parts: they fell by almost $20 billion in the first quarter.
After a long boom that pushed sales to a record in 2016, however, a temporary slowdown in purchases of new cars and trucks should come as no surprise. The industry was due for a letdown.
Still, demand remains strong and companies continue to increase production in anticipation of a rebound.
Americans also cut spending on gasoline by $6 billion in the first quarter, a reflection of lower prices at the pump.
An unusual warming trend, meanwhile, allowed households to dial back on fuel to heat their homes. February was the second hottest on U.S. record. The result: spending on “housing and utilities” declined by nearly $12 billion.
The warmer weather also made it harder for retailers to sell off the last of their cool-weather inventory. Purchases of clothing and footwear slipped nearly $5 billion.
Lower spending on these goods and services accounted for most of the decline in consumer outlays early in 2017. And that’s largely why GDP looked so poorly.
Economists were largely dismissive of the headline GDP number. Bank of Merrill Lynch called the first-quarter report “grossly distorted product.” And Richard Moody of Regions Financial wrote to clients that “we are about as unconcerned as we can be.”
Don’t expect a repeat in the second quarter, either.
Auto sales are still near record levels. Americans will need to buy more clothes for the spring. Air-conditioning bills are on the way. And oil prices have stabilized ahead of the summer driving season, a time when the cost of gas usually rises.
In other words, consumer spending is almost certain to snap back.
Nor is the economy now anything like it was in late 2009. Consumer confidence recently hit a 16-year high, the unemployment rate is extremely low at 4.5% and worker compensation is rising at the fastest pace in a decade.
The stage is set for faster U.S. growth in the spring. Economists polled by MarketWatch predict GDP will accelerate to 3% in the second quarter.