The probability that the U.S. economy will grow 3 percent this year has fallen over the last month as weak data and political concerns have dented confidence, according to a slim majority of economists in a Reuters poll.
That finding comes as hopes for tax cuts and other pro-growth policies promised by President Donald Trump have faded amid reports Trump tried to interfere with an investigation into ties between his first national security adviser and Russia. Those reports prompted the biggest sell-off in U.S. equities since early September.
With Washington policymakers distracted by Trump’s political problems, the risks of a longer timeline to see the realization of tax reforms and other pro-growth fiscal policies have increased.
A rapid pace of expansion is essential for Trump’s broader economic agenda but the U.S. economy grew at its slowest pace in three years in the first quarter, just 0.7 percent on an annualized basis.
While the latest poll of 100 economists, taken May 12-18, showed growth will rebound in the second quarter to 3.2 percent, forecasts suggest that will be the best rate through to the end of next year, with annual averages for this year and next well below the 3 percent target.
“The weak first quarter growth estimate makes it impossible for the U.S. to reach the 3 percent threshold — it would require three straight quarters of over 5 percent annualized growth,” said Rebecca Mitchell, economist at IHS Markit.
Fifty-three percent of respondents who answered an extra question said the chance of achieving 3 percent growth had fallen over the past month; 37 percent said it had not changed and just 10 percent said it had risen. (For a graphic: reut.rs/2quCpvM)
Breaking it down further, predictions for average growth in the first two quarters taken together or the first half of the year, are slightly lower than what was expected last month.
The consensus is for growth in a range of 2.4 to 2.5 percent per quarter from July this year through the end of 2018.
Even inflation forecasts have been cut slightly from last month.
The U.S. Federal Reserve’s preferred inflation gauge, the core PCE price index, is not expected to reach the central bank’s 2 percent target until the second quarter of next year.
Those predictions not only highlight the divergence between the U.S. administration’s expectations for 3 percent growth – trimmed from an earlier 4 percent – and the economy’s actual performance, they also show the challenge that Trump faces.
Indeed, economists in several Reuters polls since the start of the year, including the latest, have said chances for achieving 3 percent growth were low.
“We always thought a 3 percent growth rate this year was a remote possibility. The weak economic data in the first quarter and the diminishing prospect for stimulative fiscal policy this year appear to validate that forecast,” said Scott Anderson, chief economist at Bank of the West.
Still, the Fed is expected to continue with its plan to hike interest rates twice more this year after March’s 25 basis point lift.
The poll predicted a 25 basis point hike in the second quarter and a follow-up increase in the third, taking the fed funds rate to a range of 1.25 to 1.50 percent.
“Most Fed officials, at least in their comments, still appear resolute in their normalization plan. It’s one of the reasons why the June rate hike is firmly on the table. After that rate hike it has clearly been more debatable whether or not there will be another rate hike,” said Sam Bullard, senior economist at Wells Fargo.
“There is still a lot of runway left before we get to the June meeting, and even after that, before hard decisions need to be made. But we still think the Fed is generally on course as long as the data comes out as expected.”
When asked what would stop the Fed from taking interest rates higher twice more this year, a few economists said they believed it would be a sell-off in stock markets.
A handful also picked the divergence between sentiment and official economic data as a reason to stay the Fed’s hand on rates.
But most economists chose a fall back in core inflation as the main reason. (For a graphic: reut.rs/2qV4ZrQ)
The core personal consumption expenditure price index is expected to remain below the central bank’s 2 percent goal until the second quarter of 2018, the poll showed.
That compares with the inflation gauge that was expected to reach 2 percent toward the end of 2017 in last month’s poll. The latest consensus was again for wage growth to remain lackluster.
(Additional reporting, polling and analysis by Hari Kishan and Anu Bararia; Editing by Bernadette Baum)