America's economic growth rate collapsed in the first quarter to a stunningly slow annualized rate of 0.1 percent. Winter weather was one major reason for the unexpectedly poor number, but the sharp downshift also raises questions about important segments of the economy, notably housing.
Forecasters generally had expected a slow quarter, but one more on the order of a 1 percent growth rate – not one-tenth that pace.
Still, the poor showing announced by the Commerce Department Wednesday isn’t a sign of a possible recession or a protracted slowdown. Instead, forecasters see signs the economy is largely shaking off the winter dip.
“Fortunately, [monthly] economic indicators for March and April largely point to a rebound in activity in the spring,” writes Paul Edelstein, director of financial economics at the forecasting firm IHS Global Insight in Lexington, Mass. “Some of the more notable indicators include retail sales, motor vehicle sales, capital equipment orders, manufacturing output, labor hours worked, and payroll employment. The notable exception is housing, which appears to be suffering from general supply and demand problems.”
The economy grew 1.9 percent for the calendar year 2013, and many forecasters expect stronger growth this year. The financial firm Wells Fargo, for example, has predicted growth coming in at 2.3 percent – although such numbers could be pared back a bit as a result of the first-quarter disappointment.
Stock investors appeared unfazed by the GDP report. Major stock indexes were flat in morning trading, in part as investors waited to see whether the news would affect a Federal Reserve policy meeting set to conclude early in the afternoon.
The Fed has been progressively scaling back the pace of monthly bond purchases aimed at stimulating economic growth. But central bank officials say the economy still needs support from “accommodative” monetary policies such as unusually low interest rates.
Economists attributed the GDP slowdown largely to the effects of severe winter weather and some other unusual factors.
Mark Vitner of Wells Fargo notes that the GDP figures are preliminary ones, set to be updated in May and again in June as more accurate first-quarter data come in.
“The advance estimate [this week] only includes data on inventories and trade for the first two months of the quarter, which is where most of the slowdown took place,” he writes in an analysis of the Commerce Department numbers.
That means the first-quarter GDP may get an upward revision when the figure is adjusted in May.
Excluding the swing in trade and business inventories, Mr. Vitner says the quarterly growth numbers look similar to those in the fourth quarter – tepid but not stalled.
It’s unusual for the weather to have such a sharp impact on GDP. White House economists pointed to data showing that only three other winters since 1950 have been as cold, and that the four major snowstorms in the populous Northeast were the most on record for any quarter in the same 65-year span.
The weather affected consumer shopping especially in the area of big-ticket items like car purchases.
Still, rising incomes – boosted in part by new health care subsidies under the Affordable Care Act – helped push consumer spending up for the quarter at a 3 percent annual pace.
That was offset by the weakening of exports and declines in business investment and homebuilding. And although the “drag” of government spending cuts on the economy is expected to wane, the report showed a negative impact on GDP from state and local governments.
The export weakness could soon reverse. Vitner of Wells Fargo says recent data from Los Angeles-area ports show a revival in March. Still, the GDP report is a reminder that the global economy has some softness outside the US. Europe and Japan are struggling to get growth into gear, while many emerging markets have lost some steam.
The setback in the housing sector may be more worrisome. Housing activity has been marked for several years by lots of investor buying of foreclosed homes and a recovery of home prices. Now the question for 2014 is how well the market can return to more normal conditions driven by typical buyers and sellers.
In the wake of the first-quarter disappointment on GDP, an important signal on the overall economy’s health will come Friday when the Labor Department announces job-market numbers for April. Forecasters have projected that job gains will come in near a solid 200,000 for the month.