April 29, 2015
April 29, 2015
GDP grew at just a 0.2 percent annual rate in the first quarter, considerably worse than most analysts had expected. Even this weak number was inflated by an accumulation of inventories. Final sales actually shrank at a 0.5 percent annual rate in the quarter.
As was the case in the first quarter of 2014, weather likely played a large role in the weak showing. Of particular note, structure investment fell at a 23.1 percent annual rate, subtracting 0.75 percentage points from growth in the quarter. While there is evidence of overbuilding in many markets, this sharp decline was likely due to many project starts in the Northeast and Midwest being delayed by unusually bad weather. Car sales were also weak, declining at a 3.1 percent annual rate, subtracting 0.08 percentage points from growth. Weather probably also played a role in the 1.5 percent rate of decline in state and local government spending, which was all on the investment side. The decline in state and local spending subtracted 0.17 percentage points from GDP growth in the quarter.
The other noteworthy source of weakness was trade. The rise in the trade deficit subtracted 1.25 percentage points from the quarter’s growth. Most of this was on the export side, with exports falling at a 7.2 percent annual rate and exports of goods falling at a 13.3 percent annual rate. This is undoubtedly due to the impact of the rise in the dollar. Unless this rise is reversed, we are likely to see a further decline in our trade position, which will be a drag on growth for the foreseeable future.
It is important to recognize that while much of the weakness in this report is due to weather, even with optimistic assumptions, the underlying rate of growth would almost certainly not be much over 2.0 percent. This is not even keeping pace with potential GDP, which means that we are making up none of the ground lost in the downturn. It would be difficult to imagine that the Fed would want to slow the economy with interest rate hikes in this context.
It is also important to recognize that the weather-related weakness in the first quarter virtually guarantees strong growth in the next two quarters. Many analysts will undoubtedly seize on these stronger growth reports as evidence of a new boom as they did last year. Hopefully those in policy positions will be aware enough to dismiss such tales of boom. For more, check out the latest GDP Byte.
