Economy May Find It Hard to Spring Back From Weak Winter
This time, you can’t blame it on the weather.
For the third year in a row, the U.S. economy started the year with a dose of the blues as gross domestic product eked out a 0.5% annual gain, according to Commerce Department figures released April 28.
Yet unlike in 2014 and 2015, the blahs can’t be attributed to harsh weather. Indeed, a milder-than-normal winter may have helped, rather than hurt GDP, as builders were able to do more work outdoors than otherwise, according to Ted Wieseman, an economist with Morgan Stanley in New York.
That’s one reason why the economy may have difficulty springing back anything like it did in 2014 and 2015. Wieseman’s tracking estimate for growth this quarter is 1.4% after the economy turned in its worst performance in two years. That’s a far cry from a second-quarter surge of 4.6% in 2014 and 3.9% in 2015 as construction and other spending snapped back after being depressed by the weather earlier in those years.
Another reason for caution: a slowdown at the core of the economy. After stripping out unsold goods and trade, the two most volatile components of GDP, as well as government expenditures, so-called final sales to private domestic purchasers increased at a 1.2% rate, the weakest advance since the third quarter of 2012.
That’s a statistic monitored by economists at the White House and the Federal Reserve to gauge the underlying health of the economy. Central bank policymakers projected in March that the economy will be solid enough to allow them to raise interest rates twice this year.
Behind the slump last quarter were a sharp drop in business investment outside of residential construction — it contracted by the most since the 2009 recession — and a slackening in spending by consumers.
"The U.S. economic slowdown is proving to be sticky," Gregory Daco, head of U.S. macroeconomics at Oxford Economics in New York, said in a note to clients. "Early second-quarter data readings point to a modest GDP growth rebound in the low 2%."
Fed policymakers, after refraining from an interest-rate hike for a third straight meeting April 27, suggested they remain upbeat about the underpinnings of U.S. growth. Much of their optimism appears to be pinned on continued strength of the jobs market.
A separate report from the Labor Department on April 28 lent some credence to that view. It showed filings for unemployment benefits held last week around four-decade lows. Jobless claims rose to 257,000 from the prior week’s revised 248,000 that were the fewest since 1973.
The behavior of consumers has been a puzzle to many economists as lower gasoline prices and a strong jobs market haven’t led to a surge of spending. Household purchases, which account for almost 70% of the economy, rose at a 1.9% annual pace last quarter, the slowest in a year, compared with 2.4% in the final three months of 2015.
The cause of the recent slowdown “is a little bit of a head-scratcher,” said Kevin Cummins, an economist at RBS Securities Inc. in Stamford, Connecticut. While everything remains in place for a rebound, that forecast “seems more like a hope” at this point. He’s predicting second-quarter growth of 2.5%.
The biggest factor weighing on the economy last quarter came from companies. Nonresidential fixed investment, or spending on equipment, structures and intellectual property, dropped at a 5.9% annualized pace, the biggest decline since the second quarter of 2009, at the end of the last U.S. recession.
Last year’s slump in oil prices that extended into early 2016 led to an 86% annualized plunge in capital spending on wells and shafts, the most in records dating to 1958.
“The real troubling thing has to be the big decline in business investment,” said Omair Sharif, senior U.S. economist at Societe Generale in New York. “I’m not sure that there’s a lot of momentum at all for business investment to pick up moving forward into the second quarter.”
While there does appear to be a statistical tendency for first-quarter GDP to be weak, the latest data "cannot be entirely dismissed, as they reflect a continued deceleration in the pace of economic growth," according to Carl Riccadonna, chief U.S. economist for Bloomberg Intelligence. GDP rose at a 1.4% pace in the fourth quarter of 2015.
"The tone of the economic data will need to improve considerably for policymakers to feel justified in raising rates" at their next meeting in June, he added.
