If Trump is going to get the economy moving again, this is the key

Q4 GDP growth slows to 1.9%

If President Donald Trump is to rescue the U.S. from its worst growth rate in five years, he's going to need help from the economy's biggest driver — the consumer.

Friday's gross domestic product release produced a number that disappointed Wall Street — just 1.9 percent growth to end the year, falling short of even the meager estimates of 2.2 percent from economists surveyed by Reuters. That capped off an eight-year run under former President Barack Obama where GDP gains averaged just shy of 1.5 percent a year.

But there was good news inside the bad news.

The slip in came in large part because of a slide in exports, pushed both by a stronger dollar and the unwinding of an unsustainable burst in soybean exports that helped push the third quarter to a 3.5 percent growth rate. Exports surged 10 percent for the third quarter and contracted 4.3 percent in the final three months of the year.

Taken together, second-half growth came in at close to 2.5 percent, which in itself is well above trend for a recovery that began in mid-2009. But the impetus is even more important — a strengthened consumer who looks willing to start spending money again.

President Donald Trump speaks to reporters as he arrives aboard Air Force One at Joint Base Andrews, Maryland, January 26, 2017.
Jonathan Ernst | Reuters

"This is one where the good news outweighs the bad," Scott Clemons, chief investment strategist at Brown Brothers Harriman, said of Friday's data. "The good news is personal consumption, which is the primary engine of economic activity and which contributed just about all of the growth."

Indeed, personal consumption expenditures, which make up 68.3 percent of the $18.7 trillion U.S. economy, contributed 1.7 percentage points of the total 1.9 percent gain in the fourth quarter, according to the Bureau of Economic Analysis. The contraction in exports served as a counterweight, subtracting 1.7 percentage points.

But the consumer story doesn't end at expenditures.

Gross private domestic investment contributed 1.67 percentage points of total economic upside, with residential investment jumping 10 percent in the quarter to make up 0.37 percentage points of the total GDP gain. (The Bureau of Economic Analysis separately lists economic categories that contribute to GDP from those that subtract from GDP, so total contributors exceed the 1.9 percent growth figure.)

And there's more good news: The closely watched University of Michigan consumer sentiment index registered a 98.5 reading Friday, above the expected 98.1.

Why it matters for Trumponomics

For the Trump economy, the implications are important. If the economy is to achieve the 3-percent to 4-percent gains the new president envisions, the consumer will have to get off its back. So if anything, Friday's data cast a bigger spotlight on the tax cuts Trump wants to implement.

"With real personal disposable income rising by 3.7 percent and labor market conditions still improving, consumption growth should remain solid in the first few months of next year and will, at some point, receive a big boost from the proposed income tax cuts," Paul Ashworth, chief U.S. economist at Capital Economics, said in a note.

Ashworth expects considerably sharper gains ahead, with GDP jumping from the 1.6 performance in 2016 all the way up to 2.7 percent in 2017.

Of course, there are a number of headwinds, any of which could derail the Trump expansion.

Among them are a stronger dollar, policy uncertainty as Trump tries to move his plans through Congress, and a Federal Reserve that might be forced to raise interest rates sooner than expected if the proposals generate inflation too quickly, as some economists predict.

In fact, Clemons said there's a chance the Fed could enact four rate hikes this year, one more than central bank officials themselves have indicated and twice what the market is expecting, as gauged by fed funds futures trading.

"It's not too much of a stretch to envision what the political response would be from the White House," he said. "The Fed raises rates more often than [Trump] thinks it should, this White House being this White House takes to Twitter ... you can envision that it could spiral into a pretty negative situation by the end of the year. That's not a forecast or a projection, but it is a risk."