Economic signals still flashing green despite first-quarter slump

30 May 2015 | Author: | No comments yet »

Another first-quarter shocker: U.S. GDP falls 0.7%.

Gross domestic product shrank at a 0.7 percent annualized rate in the first quarter, revised from a previously reported 0.2 percent gain, according to Commerce Department figures issued Friday in Washington. Maureen Fallt, who works in talent management for Portland General Electric, talks to a student during a high school career fair in March at the Oregon Convention Center. About 100 employers participated in the expo. (Kristyna Wentz-Graff/The Oregonian) The government’s revision for last quarter was weaker than its initial estimate of a 0.2 percent growth rate. While bad weather once again probably contributed to last quarter’s slump, other impediments were also at work — including a swelling trade deficit caused by a strong dollar and plunging investment in oil exploration following the drop in fuel prices. And cutbacks in oil drilling, a result of low energy prices, could depress spending in the energy industry. “While the evidence of a second-quarter rebound hasn’t been overwhelming, we still think that the outlook for the economy is very encouraging,” Paul Ashworth, chief U.S. economist at Capital Economics, wrote in a research note.

Consumer spending, which drives about 70 percent of economic activity, slowed to annual growth of just 1.8 percent for the quarter, slightly below the government’s first estimate. The government said last week it was aware of the potential problem and was working to minimize it. “Survey evidence is already pointing to a second-quarter pick-up.

The MarketWatch survey estimates GDP will increase 3.2% in second quarter, though a new tracking tool created by the Atlanta Federal Reserve puts the gain at just under 1% with a month to go. One of the biggest hits to the economy last quarter came from cuts in drilling activity by energy companies — fallout from the sharp drop in oil prices over the past year. A measure of domestic demand growth was revised up slightly and business spending on equipment was much stronger than previously estimated, taking some edge off the slump in output. Last quarter’s contraction was smaller than the 2.1 percent fall at the start of 2014, when a prolonged patch of bitterly cold temperatures held back the economy.

That resulted in a trade deficit that subtracted 1.90 percentage points from GDP, the largest drag in 31 years, instead of the 1.25 percentage points reported last month. The various research results indicate first-quarter growth has underperformed the rest of the year by about 1.6 percentage points to 1.7 percentage points on average.

That was the largest drop in a year and the second quarterly fall, as the dollar weighed on multinational corporations and oil prices hurt domestic firms. Multinationals like Microsoft Corp, household products maker Procter & Gamble Co. and health care conglomerate Johnson & Johnson have warned the dollar will hit sales and profits this year. The Bureau of Economic Analysis this month said it’ll make changes to try to minimize the issue, and take this into account when reporting annual benchmark revisions in July. While the economy has pulled out of its first-quarter stall, data on retail sales and industrial production have suggested only a modest pace of growth early in the second quarter. In the opening months of 2015, exports sank 7.6% while the increase in imports was raised to 5.6% from a preliminary 1.8%, revised government data show.

She said several economic reports next week including consumer spending, the trade deficit and auto sales for May should provide important clues on the economy’s momentum. Revisions to incomes showed wages and salaries rose even more than last reported and the saving rate was the highest since the end of 2012, indicating households can unleash some pent-up demand. Still, it marked the weakest reading in six months. “The index is still quite high,” Richard Curtin, director of the Michigan Survey of Consumers, said on a conference call after the figures were released. A Bloomberg survey of economists in May predicted growth will accelerate to a 2.7 percent pace in April through June, with household consumption expanding 3.2 percent.

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