First Quarter Economic Growth is Slower Than Expected But That is Not Surprising

The Bureau of Economic Analysis released their first estimate of first quarter economic growth (GDP). As a reminder, this is their preliminary estimate with two revisions to follow over the next two months.

First quarter GDP is estimated to have risen .2%. This is far lower than the 2.2% growth rate of the fourth quarter of 2014 and below the consensus estimate of 1.0% from a Bloomberg survey of economists.  We have to view this report with caution since we know that weather had an impact as did the West Coast port problems.

If we look behind the headline numbers, we see that positive contributions from consumer spending were mostly offset by the negative contribution from net exports. Private investment was up slightly while federal spending was down slightly. The net result was .2% economic growth.

Drilling down deeper into the data reveals the following.

1. Consumer spending added 1.31% to GDP growth.
   • Consumer spending was almost all focused on what consumers have to buy (services) versus what they may want to buy (goods).
     • Spending on housing and utility costs contributed .59% to GDP
     • Spending on healthcare costs contributed .62% to GDP
   • All other spending contributed .05% to GDP
2. Net exports subtracted 1.25% from GDP
   • A slowdwon in exports resulted in exports subtracting .96%
   • Imports subtracted .29%
3. Private investment added .34% to GDP growth
   • Commercial construction substracted .75%
   • An increase in inventories added .74%
   • Equipment spending was 0%
   • Intellectual property added .30%
   • All other private invested added .05%
4. Government spending subtracted .15% from GDP growth
5. Miscellaneous spending subtracted .05% from GDP growth

Today’s report provides two takeaways to consider.

1. As of yet, the consumer is not spending their gasoline savings on goods. This can be seen from the above data as well as the fact that the personal savings rate rose from 4.6% in the fourth quarter to 5.5% in the first quarter. As has been discussed in past newsletters, this is not surprising. Historically, consumers have held off on spending savings from energy until they see the lower prices sustained. Typically this would mean 6-9 months need to pass with lower energy costs before consumers become more confident to spend the savings.
2. The strong dollar appears to be having a more immediate impact than most economists predicted at the beginning of the year. This can be seen from the export data. Exports added .59% in the fourth quarter, so the swing to a negative .96% is significant.

Now that the weather and the West Coast port problems are behind us, attention will focus on how the second quarter develops. We continue to believe that it would not be surprising to see the first half of the year show weaker than forecast growth due to the negative impact of a strong dollar and cut backs in the energy related sectors. If energy prices remain near current levels and overall jobs growth continues, then economic growth should be stronger in the second half of the year due to wage growth and more willingness to spend some of the energy savings.

The Federal Reserve has been very clear that the economic data will guide them on when to begin raising short-term interest rates. Today’s GDP report should ensure that the Federal Reserve does not raise rates in June or July. September appears to be the soonest that they would raise interest rates but, that will remain dependent on what the economic data shows over the next five months.

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