1. Fourth Quarter GDP Report Was a Big Disappointment

2. The Emerging Markets Face Looming US Dollar Crisis

3. Mr. Trump Says Dollar “Too Strong” – Hurts US Economy

Overview

Over the last eight years, with US interest rates at rock bottom thanks to the Fed, the rest of the world has borrowed a huge amount of dollars – about $4 trillion according to the Bank for International Settlements. During that same time, the US dollar has soared against a basket of foreign currencies.

The majority of this borrowing has been by so-called “emerging nations” that now look to have serious trouble paying back their US dollar-denominated debt, given that the greenback has gone up so much in the last few years. It’s complicated but I’ll break it down for you today.

But before we get to that discussion, let’s take a look at Friday’s initial estimate of 4Q GDP from the government. It received scant attention in the media given the non-stop coverage of President Trump and his flurry of executive actions in his first week in office.

Fourth Quarter GDP Report Was a Big Disappointment

The US economy’s expansion slowed in the 4Q, and annual growth failed to reach 3% for an 11th straight year, reflecting the huge hurdles the Trump administration faces in trying to speed up a nearly eight year-old weak expansion.

The Commerce Department reported Friday that 4Q GDP expanded by a disappointing 1.9% (annual rate) in its first of three estimates. This was below the pre-report consensus of 2.2%, and was well below the 3.5% pace in the 3Q.

If the advance 4Q report of 1.9% holds up, that will mean the US economy expanded at an unimpressive annual rate of only 1.6% for all of 2016, compared to 2.6% in 2015. That was also well below the average annual rate of 2.1% since the Great Recession ended in mid-2009.

Real GDP

In the 4Q, the biggest factor contributing to the slowdown was a widening in the trade deficit. Exports, which had been temporarily bolstered in the 3Q by a surge in sales of soybeans to Latin America, retreated in the 4Q. Meanwhile, imports which are a drag on GDP, surged in the final three months of last year.

In light of the much weaker than expected GDP growth in the 4Q, the question now is whether the much stronger than expected growth of 3.5% in the 3Q was an aberration? The answer is probably so. It will be interesting to see if the Commerce Department revises the 3Q GDP estimate lower in subsequent reports.

Consumer spending, which accounts for 70% of economic growth, slowed to 2.5% in the 4Q from a 3% gain in the 3Q. Trade cut 1.7% from GDP growth in the 4Q after adding 0.9% to growth in the 3Q. A higher trade deficit subtracts from economic growth because it means more production is being supplied from abroad.

On the bright side, business investment spending accelerated in the 4Q, rising at a 2.4% rate, the best showing in more than a year. That’s a hopeful sign that the prolonged slowdown in investment spending, reflecting in part big cuts by energy companies, is coming to an end.

President Trump has set a goal of doubling GDP growth to at least 4% through an ambitious stimulus program featuring tax cuts, deregulation and higher infrastructure spending. Yet private economists believe sustained annual growth rates of 4% will be a tough goal to achieve for a variety of reasons.

It will be interesting to see how economists react to Friday’s weaker than expected GDP report. Many had increased their forecasts in light of the strong 3Q estimate. In fact, just last week – before last Friday’s weak GDP report – economists at the International Monetary Fund (IMF) boosted their outlook for US GDP to 2.3% this year and 2.5% in 2018.

IMF economists said the upward revisions were due to strong growth in the 3Q and the expectations that Trump’s economic program of tax cuts, regulatory relief and higher infrastructure spending had boosted growth prospects. It remains to be seen how those same economists and others feel now in light of Friday’s disappointing 4Q GDP report.

The Emerging Markets Face Looming US Dollar Crisis

The US dollar has risen significantly in the last few years. Most currency analysts expect the dollar to continue to rise, especially if the Fed continues to hike short-term interest rates. Generally speaking a strong dollar means weak commodities (like oil), and weak commodity prices tend to be bad for emerging markets.