A new government reports shows the American economy contracted in the first quarter of the year for the second straight time.
The U.S. Commerce Department on Friday reported the gross domestic product, the widest measure of output of goods and services, declined at an annual rate of 0.7% in January through March, following a report a month earlier showing a paltry 0.2% yearly increase.
The latest number was not surprising to many analysts who were forecasting a decline of around 1%, still blaming the performance on harsh weather during the period, less demand for factory made goods, a stronger dollar and even labor problems at West Coast ports at the time, which slowed freight movements.
Consumer spending during the quarter increased 1.8%, down a notch from the 1.9% improvement in a report a month ago, but far less than the 4.4% increase seen in the final quarter of 2014.
Business investment declined 2.8%, less than the 3.4% drop that was previously reported while exports declined 7.6%.
Even with some analysts forecasting a second quarter rebound and expectations the GDP will increase 2% for the first six months of 2014, others are less optimistic seeing just a 1.5% increase, which would be the worst first half performance since the Great Recession.
“Many analysts have been quick to point out the presumed transitory nature of the weakness across the first three months of 2015; a larger-than-expected trade gap resulting from a surge in imports following the West Coast port disruptions, and a smaller increase in inventory building. However, the weakness was more widespread than just inventories and trade, transcending the thesis of isolated pockets of softness,” said Lindsey Piegza, chief economist at the investment firm Sterne Agee. “After all, there remains marked weakness in two key sectors of the economy, household spending and business investment.”
She believes looking out to the second-quarter, the market and U.S. Federal Reserve officials alike, remain optimistic of a near-term surge in growth. However, Piegza notes with consumers pulling back and business spending continuing to wane into April, there appears very little momentum in the pipeline to suggest a 2014-style rebound in the coming quarters.
“Remember Fed officials are eager to raise rates, many are chomping at the bit, but the data needs to support a change in monetary policy,” she said. “Slower-than-expected growth at the start of the year, much of which cannot be dismissed because of temporary or transitory factors, let alone cold winter weather, coupled with a disappointing second quarter, should be enough to keep the Fed on hold well into the end of the year or beyond into 2016.”
She noted even the most hawkish members of the Fed have conceded that the data needs to support a change in monetary policy.
“Thus, while the hope remains growth will be strong enough to support liftoff [of interest rates] in the near-term, the underperformance of the economy is likely to extend the timeline for the first Fed rate hike, as it has for the past five years.”
Consumer Sentiment Also Declines
On a separate economic note, a survey of consumers found their attitude about the economy fell this month, according the University of Michigan Survey of Consumer Sentiment.
Its Index of Consumer Sentiment fell to 81.9, down 7.6% from April but still 8.2% higher than the same time a year ago. Similar trends were recorded in its measures of current economic conditions for consumers as well as their expectations.
“Confidence fell in early May as consumers became increasingly convinced that there would be no quick and robust rebound following the dismal frist quarter,” said Surveys of Consumers Chief Economist, Richard Curtin. “The decline was widespread among all age and income subgroups as well as across all regions of the country. “
He said that in contrast to last year's rapid second quarter revival, this year the economy faces reduced production and employment from lower oil prices, falling exports, and rising imports from a stronger dollar.
“Although this was not the first time in recent years consumers have abandoned expectations for a faster recovery, the data nonetheless suggest that consumers have remained optimistic about their future personal finances and have maintained their buying plans at reasonably high levels,” said Curtin. “Overall, at this time the data are still consistent with a 3% growth rate in real personal consumption expenditures during 2015.”