Economy in U.S. Shrinks for Third Time Since Expansion Began

29 May 2015 | Author: | No comments yet »

Economists React to First-Quarter GDP: ‘Even Weaker Than Before, But…’.

A harsh winter, a strong dollar and falling oil prices took their toll on the US economy in the first quarter, the Commerce Department revealed on Friday. As The Wall Street Journal notes: “The revision, near economists’ expectation of a 1 percent contraction, showed how the world’s largest economy remains vulnerable to shocks as it struggles to regain its vigor. The government on Friday slashed its gross domestic product estimate to show it shrinking at a 0.7 percent annual rate instead of the 0.2 percent growth pace it estimated last month.

The dip, expected to be short-lived, marked the third quarterly contraction since the economy emerged from recession in mid-2009.” In addition to the hard winter, the trade gap, the difference between exports and imports, was also wider than first reported. Nevertheless, given that much of the downward revisions were driven by weaker trade and a smaller inventory build, we interpret this mix of revisions as a net positive for second-quarter GDP accounting, though we continue to expect the rebound in GDP growth [in the second quarter] remains subdued, somewhere in the 2.0% to 2.5% range.” –Millan Mulraine, deputy head of U.S. strategy at TD Securities “Even though [the first quarter] may eventually get revised higher, it was clearly a weak quarter for growth. Economists had expected a sharp reduction in the original estimate of a 0.2 percent annual pace of growth, as more detailed data has trickled out in recent weeks. The modest upside surprise in the today’s headline figure was mainly related to inventories, and this is an unfavorable development for second-quarter growth.

A measure of domestic demand was revised up one-tenth of a percentage point to a 0.8 percent rate and business spending on equipment was much stronger than previously estimated, taking some edge off the slump in output. Home sales and construction are rebounding, along with business investment.” And, a week ago, Federal Reserve Chair Janet Yellen said that the bank was on track for its first interest rate hike since 2006 later this year in response to the overall improving economy.

Apart from the statistical quirk, the economy, which expanded at a 2.2 percent pace in the fourth quarter, was hammered by labour disruptions at West Coast ports. In a statement released the Council of Economic Advisers, Chairman Jason Furman said despite the downward revision “The combination of personal consumption and fixed investment, the most stable components of GDP, has grown 3.4 percent over the past four quarters. 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. Also dragging on growth was a sharp decline in investment spending in the energy sector as companies such as Schlumberger and Halliburton responded to the plunge in crude oil prices.

The GDI data have been stronger than the GDP data as well.” –Jim O’Sullivan, chief U.S. economist at High Frequency Economics “The biggest single driver of the revision was foreign trade, where the GDP contribution was cut from -1.3% to -1.9%. The government said investment in the category that covers energy exploration plunged at an annual rate of 48.6 percent, the steepest drop since 2009, during the Great Recession.” The Bureau of Economic Analysis did not expect the end of the port dispute in late February to be followed by a massive surge in March imports, with only a small uptick in exports.

The GDP decline is unlikely to change thinking at the Federal Reserve, which is considering its first hike in interest rates since the 2008 economic crisis. Some of that is also linked to extremely harsh winter weather than swept large parts of the country during the period, stifling business and consumer activity, especially construction.

As a result, we look to other indicators such as payroll growth, the unemployment rate, and the ISMs to get a complementary reading on near-term momentum. 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 straight quarterly fall, as the dollar weighed on multinational corporations and oil prices hurt domestic firms. These data, in our view, are not consistent with a contraction in GDP, but are, instead, a reflection of a soft patch in activity from adverse weather.

However, she cautioned the market not to expect any rapid increase in rates. “After we begin raising the federal funds rate, I anticipate that the pace of normalization is likely to be gradual,” she said in a speech in Rhode Island. Multinationals like Microsoft Corp , household products maker Procter & Gamble Co and healthcare conglomerate Johnson & Johnson have warned the dollar will hit sales and profits this year.

Markets took the downgrade to the GDP estimate in stride, reacting more to fresh data releases showing a downturn in consumer confidence this month and a slowdown in business activity in the Chicago region. My miss of three-tenths on today’s reading was mainly on inventories, so I am going to knock down my second-quarter estimate by an offsetting amount. The broad-based S&P 500 lost 0.6 percent, but remained close to Wednesday’s record, while the dollar edged 0.2 percent higher against the euro to $1.097. The jobs data suggests growth remains solid and we expect GDP growth to rebound and affirm that message.“ —John Ryding and Conrad DeQuadros, economists at RDQ Economics “The economy should bounce back in the second quarter, with growth of at least 3%. Consumer spending will pick up thanks to solid job gains and modest wage growth, and as households spend some of the savings from lower gasoline prices.

A widening trade deficit subtracted 1.9 percentage points from growth, the most since 1985, compared with the previously estimated drag of 1.25 points, according to the Commerce Department’s data. The dollar rally has faded and the greenback is about 4 percent off its peak in March against the currencies of the main U.S. trading partners, easing pressure on U.S. exporters.

Importantly, consumer spending, business equipment spending and residential investment remain resilient and should accelerate in [the second quarter]. International crosscurrents and reduced mining activity will continue to weigh on U.S. activity, but we expect these constraints will gradually dissipate.

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. During the latter half of the month, “I expected confidence to inch upward and I still think that is likely over the months ahead.” The economy is poised to pick up this quarter.

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