U. S. economy barely grows in year’s first quarter
WASHINGTON — The U. S. economy nearly stopped growing in the January- March quarter, squeezed by a combination of factors that will either fade ( a harsh winter) or persist ( a stronger dollar).
Growth was a barely discernible 0.2 percent annual rate in the first quarter, the Commerce Department said Wednesday. That’s the poorest showing in a year and a sharp deceleration from a 3.6 percent rate in the second half of last year.
Most economists expect growth to rebound in the coming months as shortlived problems, such as a West Coast port strike, dissipate. But the rebound isn’t likely to be that healthy, as the high value of the dollar and other trends continue to weigh on growth. Several economists slashed their forecasts for the April- June quarter to 2.5 percent from roughly 3.5 percent.
“It’s hard to sugarcoat today’s number,” said Michael Feroli, an economist at JPMorgan Chase. “It was disappointingly soft.”
Here are the key factors behind the first quarter’s weak showing, and which are worth worrying about.
Another harsh winter: For the second year in a row, freezing temperatures and snowstorms delayed homebuilding, kept consumers away from shops and weighed down the economy. Ethan Harris, global economist at Bank of America Merrill Lynch, estimates it shaved 0.5 percentage points from growth. Consumer spending growth fell to just 1.9 percent, down sharply from 4.4 percent in the previous quarter.
Should we be worried? No. Spending should rebound now that the snow has melted. Strong hiring and lower gas prices, compared with a year ago, should give Americans more spending power.
Strong dollar slams exports, profits: Exports of U. S. goods plummeted 13.3 percent, the most since the first quarter of 2009 during the depths of the recession. Imports rose slightly, widening the trade deficit and slashing 1.25 percentage The U. S. economy slowed in the first quarter of 2015 with a growth rate of 0.2 percent, down from a 2.2 percent gain in the previous quarter.
0.2% points from growth. The strong dollar is partly to blame: It has jumped 19 percent since last June. That makes U. S. exports more expensive and imports into the U. S. cheaper.
Should we be worried? Yes. The dollar is expected to remain strong, given that the Federal Reserve likely will start raising short- term interest rates later this year. That makes it more profitable for foreigners to invest in the U. S., boosting demand for the dollar. Harris forecasts the stronger dollar will cut growth this year by 0.5 percentage points.
Strike shuts down ports: A labor dispute at West Coast ports is also partly to blame for the wider trade gap. It delayed the shipment of exports and imports and may have cut 0.2 percentage points from growth, Harris estimates.
Should we be worried? Maybe. The strike is over, which should boost exports in the April- June quarter. But imports may also come in faster, potentially worsening the trade gap and slowing growth.
Goods pile up: Goods and raw materials piled up in warehouses across the country at the fastest pace in more than four years. This trend actually added 0.74 percentage points to growth because companies had to produce those goods. Without the increase in stockpiling, the economy actually would have shrank in the first quarter.
Should we be worried? Yes — because this positive trend is almost certainly temporary. The big increase in inventories likely occurred because sales slowed. That means companies will focus on clearing their warehouses and store shelves in the coming quarter, reducing their need for new products.
Cheaper oil cuts business investment: Sharply lower oil prices in the past year have caused oil and gas companies to cut back on drilling and exploration. Few new wells are being dug, and the number of rigs in operation has fallen. That caused investment in a category that includes oil and gas to tumble by 48.7 percent. The plunge dragged down overall investment in structures, which includes rigs, by 3.4 percent, the weakest showing since the fourth quarter of 2009.
Should we be worried? Yes. Most economists expect cheap oil will weigh on business investment for at least one more quarter. And with profits being slammed by the strong dollar, which makes overseas earnings less valuable, companies are reluctant to spend elsewhere.