Economy shrinks in first quarter for second straight year

30 May 2015 | Author: | No comments yet »

5 Things to Know About the Economy This Week.

WASHINGTON — The economy shrank in the first quarter for the second straight year, and some of the problems could linger into the summer, demonstrating the continuing weakness of the recovery from the Great Recession. The dollar had the biggest back-to-back weekly gains versus the yen since November, shrugging off downbeat U.S. economic data as investors see the Federal Reserve moving closer to raising interest rates this year.

Total economic output, also known as gross domestic product, decreased at a 0.7% annual rate from January through March, the Commerce Department said Friday, as severe weather in the Northeast and Midwest combined with the West Coast ports dispute and the soaring U.S. dollar to smother growth. “It just shows you how delicate and fragile the U.S. economy still is that even a tiny gust of wind can blow it over,” said Lindsey Piegza, chief economist at brokerage Sterne Agee. Economists aren’t worried about another recession, noting that temporary factors and potential problems with seasonal adjustments in the data were key factors in the first-quarter contraction.

A larger trade deficit and a smaller accumulation of inventories by businesses than previously thought will probably account for much of the expected downward revision. That was far worse than the agency’s initial estimate that showed 0.2% growth, marking an abrupt reversal from the prior nine months when growth surged and the economy appeared on the verge of a long-delayed breakout. Bulls are counting on an improved U.S. jobs market and signs inflation is picking up to lead to higher borrowing costs, while central banks in Japan and the euro region keep applying monetary stimulus to revive their economies. “It’s kind of like a Hollywood script which you know the plot already — you have a weak first quarter, you get a stable second quarter, and you get a rebound in the second half of the year,” Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California, said by phone. “Yellen and other Fed presidents have all been fairly hawkish. The economy has now contracted in three separate quarters since the recession ended in mid-2009, a series of disappointments unmatched since the expansions of the 1950s.

They’re all talking about rate hikes, that’s been pushing the dollar up.” The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, climbed 1 percent this week to 1,191.94, adding to last week’s 2.6 percent advance. The greenback has risen almost every day since May 22, when a key inflation measure climbed faster than economists predicted and Fed Chair Janet Yellen said she expected rates to increase in 2015. The central bank is looking for signs of a rebound soon as it plots when and how quickly to raise short-term interest rates, which have been near zero since December 2008 to stir economic growth. The bureau will update its calculations to make up for possible shortcomings in its seasonal adjustment calculations, but those won’t be available until the second quarter’s GDP drops on July 30. “With our larger reach, we will be able to accelerate the deployment of faster Internet speeds, state-of-the-art video experiences, and fully–featured voice products, at highly competitive prices,” Tom Rutledge, president and CEO of Charter Communications, said in a statement Tuesday. Time Warner has been looking for a suitable buyer ever since pressure from regulators (in part) caused Comcast Corp. to pull out of the buying process earlier this year.

Some analysts predicted that the first rate hike since 2006, which would signal that central bank policymakers believe the economy is on solid footing, now won’t happen until at least late this year. Apart from the statistical quirk, the economy, which expanded at a 2.2 percent pace in the fourth quarter, was hammered by labor disruptions at a major port. The first half of 2015 is shaping up to be one of the weakest six-month stretches of the expansion, with economists predicting annualized growth of between 2% and 3% during the current quarter.

If Charter is allowed to go through with its Time Warner/Bright House deal, it still wouldn’t be nearly as large as the since-abandoned Comcast-Time Warner merger. 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 pickup. 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 cutback in oil investment was bigger than what people thought and the benefits through increased purchasing power for consumers have not materialized,” said Harm Bandholz, chief US economist at UniCredit Research in New York. But the FCC still needs to sign off on the deal, and chairman Tom Wheeler earlier this week issued a statement that said “absence of harm is not sufficient” for approval. Trade was hit both by the strong dollar and the ports dispute, which weighed on exports through the quarter and then unleashed a flood of imports in March after it was resolved.

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. 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.

Unlike 2014, when growth snapped backed quickly after a dismal first quarter, the dollar and investment cuts by energy companies continue to hamstring activity. Peter Roskam, R-Ill., who chairs a House subcommittee that oversees the IRS, told CNN Thursday that the attack is believed to have originated from Russia. “It’s a problem, no matter where it’s coming from, for the taxpayers and the IRS,” Roskam said Thursday, according to CNN. “It surely doesn’t help matters, though, that it’s coming from Russia, for all the obvious geopolitical reasons.” While not nearly as overblown as the Sony hack believed to have originated in North Korea, the security breach is another example of foreign powers’ ability to hack their way into Americans’ personal information. “This is probably the number one metric the Fed wants to see improvement on,” Anthony Valeri, investment strategist at LPL Financial, says of wage gains. “This is heading in the right direction.” Pay gains in the U.S. have largely been stagnant for several years, and inflation (for which the Consumer Price Index is an indicator) has been almost nonexistent.

The rising value of the dollar against other currencies also made imports less expensive while increasing the costs for foreigners to purchase U.S. goods. 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 trade deficit swelled in March to its largest gap since 2008. “The first-quarter slowdown was the result of harsh winter weather, tepid foreign demand and consumers saving the windfall from lower oil prices,” said Jason Furman, chairman of the White House Council of Economic Advisors. Despite a few dips here and there, the stock market has continued to chug along. “We wait for when it’s going to break as it slowly grinds higher,” says Linda Duessel, a senior vice president, equity strategist and client portfolio manager at Federated Investors. “I will have a hard time getting bearish on the market or the economy as long as jobs continue to look better.

He cautioned against reading too much into one quarter’s data, saying that consumer spending and business investment were up a combined 3.4% over the 12 months that ended March 31 and that job growth has been solid. 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. But the threat of impending Federal Reserve interest rate hikes continues to loom, and volatility is likely to pick up through the rest of the year as the economy gets closer to a rate increase. “I would say we’ve seen volatility already. In addition, rig counts suggest the energy investment rout is nearing its end. “As temporary factors fade in importance, fundamentals will reassert themselves,” said Ben Herzon and economist at Macroeconomic Advisers in St. While a key measure of U.S. corporations’ after-tax profits grew 3.1% over the period, it wasn’t on pace to match the growth of the prior two years. “We have a macro-slowdown around the world,” Stephen Angel, chief executive of industrial gas supplier Praxair Inc., told analysts this past week. “There’s less capital investment.

That has raised questions about whether the government is having trouble seasonally adjusting activity in the winter and is over-stating first quarter weakness. The bureau said changes in seasonal patterns could lead to what it called “residual seasonality” — the continued influence of those patterns in data that already had been adjusted to take them into account. The oil-price drop has boosted consumers’ finances by lowering their gasoline bills, a development expected to boost the economy throughout this year. But the most dramatic effect thus far has been a drop in business investment, with energy companies holding off on drilling and equipment purchases as they deal with squeezed profits.

Analysts also say that steadily solid hiring, which has helped cut the unemployment rate to a seven-year low of 5.4 percent, will continue to put money in more people’s hands and fuel spending gains. Right at Home Inc., a nursing-care provider for seniors and the disabled, shows the divide between the strong hiring outlook and the struggle to deliver higher-paying jobs that would significantly boost overall economic growth. Rob Chester, owner of a mid-Atlantic franchise of the company, said he’s unfazed by the economy’s latest struggles because of long-term dynamics working in his favor, namely the aging of baby boomers. The franchise plans to hire between 15 and 30 caregivers for a Maryland location this summer. “There’s going to be an increasing demand for this type of service,” Mr. But the jobs aren’t the kind of well-paying positions that provide a bigger economic boost and that previous expansions delivered in greater numbers.

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