Heading into today’s release of the first revision of the Gross Domestic Product numbers for the first three months of the year, most analysts were expecting bad news of some sort. Last month’s first report had already shown us that the economy had at the very least slowed to a crawl in the first quarter, and it wouldn’t have taken much to push the economy into negative territory yet again, and that’s exactly what happened:
The economy got off to an even weaker start this year than first thought, the government reported Friday, as economic activity contracted amid a disappointing trade picture and continued caution on spending by businesses and consumers alike.
The 0.7 percent decline in economic output in the first quarter of 2015 was a reversal of the initial 0.2 percent advance for the period reported last month by the Commerce Department.
While statistical quirks and one-time factors like wintry weather in some parts of the country played a role, as did a work slowdown at West Coast ports, the lackluster report for January, February and March underscores the American economy’s seeming inability to generate much momentum.
Much of the revision was spurred by fresh data showing businesses added to inventories at a slower pace than first estimated, while net exports fell slightly more than first thought. A sharp pullback in energy exploration in the wake of falling oil prices is also putting pressure on business investment.
Most experts had expected Friday’s data to show a contraction in the first quarter, and virtually no mainstream economists believe the country is on the verge of a recession. Still, the weakness is a reason the Federal Reserve is not expected to raise short-term interest rates until the second half of 2015, after speculation that a June increase was possible.
Consumers, who generate roughly two-thirds of growth, have also been less willing to open their wallets, despite the windfall provided by lower gasoline prices. Personal consumption rose by 1.8 percent last quarter, down from 4.4 percent in late 2014.
After the economy grew at an annual rate of nearly 5 percent in the springand summer of 2014, some experts concluded that the economy had found its footing and predicted that a healthier, sustained growth rate of near 3 percent was finally at hand.
The new data for the first quarter, and signs of only a tepid rebound in the current, second quarter of 2015, are now forcing some economists to rethink earlier assumptions.
“This isn’t the off-to-the-races kind of expansion we envisioned six months ago,” said Scott Anderson, chief economist at Bank of the West in San Francisco. “More and more folks are coming around to the view that the long-term growth rate of the American economy is 2 percent, at best. We can’t sustain 3 or 4 percent growth for very long, so it’s two steps forward, one step back.”
More from The Wall Street Journal:
WASHINGTON—The U.S. economy contracted early this year as harsh weather and a strong dollar sapped demand for American goods, underscoring the choppiness of an expansion that has struggled to lift off.
Gross domestic product, the broadest sum of goods and services produced across the economy, shrank at a 0.7% seasonally adjusted annual rate in the first quarter, the Commerce Department said Friday. The agency previously estimated output grew 0.2% from January through March.
The revision, which was near economists’ latest estimate of a 1% contraction, showed how the world’s largest economy remains vulnerable to shocks as it struggles to regain its vigor. The dip, expected to be short-lived, marked the third quarterly contraction since the economy emerged from recession in mid-2009.
The latest downgrade came after new data showed a wider trade deficit and a slower pace of restocking by firms than earlier estimates, damping demand at factories and service providers. Those developments added to an already bleak picture of weak consumer spending and a downturn in business investment.
The report also offered the first estimate of corporate profits for the quarter. The Commerce Department said profits after tax, without inventory valuation and capital consumption adjustments, grew 3.1% in from the last three months of 2014. Profits were up 9.2% from a year earlier. The measure closely aligns with what companies report in earnings statements.
Most economists expect the economy to regain steam as the year unfolds, and early signs point to a slight spring rebound. GDP is expected to grow at a roughly 2% pace in the current quarter under economists’ latest projections.
But underlying demand appears to have reverted to sluggishness after a surge in output last summer sparked hopes of the economy finally shifting into a higher gear. Compared to a year earlier, the economy grew 2.7% in the first quarter, though that figure is exaggerated by a sharp contraction that occurred in the first quarter of 2014.
Consumer spending, representing more than two-thirds of economic output, grew at a 1.8% rate in the first quarter, replacing the initial estimate of 1.9%. That was far slower than the fourth quarter’s 4.4% growth. Household spending on long-lasting manufactured items was the weakest in nearly four years in the first quarter.
Business investment—reflecting spending on construction, machinery, and research and development—fell at a 2.8% pace. That was the biggest decline since late 2009. The agency had initially said it fell 3.4%.
Companies also spent less on restocking their shelves than previously thought, a big factor leading to the downward revision in overall GDP.
Exports declined 7.6%, further than the prior estimate of a 7.2% drop. Exports of goods fell by 14%, the most in six years.
Government spending fell 1.1%, replacing the previously reported 0.8% drop.
Quarterly contractions have been rare during expansions, but the nearly six years since the last recession have been marked by halting progress. The economy contracted at a 2.1% pace in the first quarter of 2014 before bouncing back in the rest of the year. In the first quarter of 2011, the economy shrank 1.5%, then rebounded.
Federal Reserve officials, who are weighing whether to raise interest rates later this year, have indicated they view the latest setback as a blip.
“Economic growth slowed during the winter months, in part reflecting transitory factors,” the Fed said in a statement after a policy meeting in late April. Those factors include unusually cold weather that kept consumers home and shut down business operations, along with a labor dispute at West Coast ports that temporarily halted the flow of goods.
This is the second first quarter in a row that we’ve seen an economic downturn, and as was the case when the economy shrank 3.0% in the first three months of 2014, there are those who are blaming this downturn on the winter weather. The problem with that explanation, though, is that while the winter of 2015 was cold and snowy, it was nowhere near the magnitude of what we experienced in 2014. Additionally, the downturn in 2014 happened in the wake of what had been a relatively robust 4th quarter in 2014, so it was much more of a shock when it happened and much easier to see that it was in fact an anomaly based largely on the impact of a winter that caused large segments of the Northeast and Midwest to grind to a halt for weeks at a time. This isn’t entirely the case this time around. In addition to the fact that the winter of 2015, while strong, was not nearly as bad as the year before, the first quarter of this year was preceded by a 4th quarter in 2014 that was quite weak. Additionally, as noted, the forecasts for 2015 going forward see modest growth in the 2.0-2.5% range for the year as a whole. That’s better than nothing, obviously, but it is also reflective of what we’ve seen for much of this recovery, weak growth that ends up feeling more like marking time than anything else.
Perhaps the most concerning thing about the numbers released today is the fact that they seem to reflect that two most important sectors of the economy seem to be slowing down at the same time. Consumer spending declined in the first quarter despite the fact that both personal and disposable income increased and prices decreased, an indication that consumers were holding back on spending for one reason or another. Similarly, while business spending and investment did increase slightly during the period, it was a relatively paltry increase and a closer look at the data reveals that spending on information technology and other areas by businesses decreased during the first three months of the year. When both businesses and consumers are holding back on spending, that’s likely an indication that people in both sectors in the economy have some reason to feel insecure, and that doesn’t bode well for the economy.
As I noted when the first report came out last month, the biggest question going forward is what impact the economy will have on the 2016 elections. Obviously, a downturn at any point between now and the election would tend to be bad news for the incumbent party. At the moment, though, it doesn’t appear that we are actually headed for a sustained recession, especially given the fact that lower energy prices will likely continue to provide a boost to economic growth in at least some modest respect. At the same time, we’re also unlikely to see a booming economy with 3.0% or higher growth, either. We’ve had one or two quarters of that here and there during the course of the recovery, but we’ve never seen a sustained period of high growth like that and there’s no reason to think it will happen now. What’s more likely is that we’ll see the same piddling two to three percent growth that we’ve seen for most of the recovery, and that things will be roughly the same for most Americans. This kind of economic stagnation is ripe, I would suggest, for much of the rhetoric that we’re seeing from both sides of the political aisle right now on issues such as trade, immigration, income inequality, and the life. It also brings to mind the results of the recently concluded British General Election. As we saw there, the Tories benefited greatly from modest but steady economic growth and Labour had real difficulty in convincing voters to change parties. Republicans may find themselves in similar trouble if the economy stays relatively positive going forward even if the growth numbers are anemic at best.
