What does weak U.S. economic growth in first quarter mean for the current recovery?

The U.S. Bureau of Economic Analysis this morning released data showing the annual growth rate of gross domestic product was 0.2 percent during the first three months of 2015. This topline result certainly isn’t encouraging, with an expected growth of 1 percent. But given the volatility in the numbers and the trends in GDP growth during the recovery, we should be standing by the alarms but not quite sounding them yet.

Personal consumption expenditures led the way, increasing at a 1.9 percent rate during the first quarter. This sector of the economy contributed 1.31 percentage points toward the overall growth rate. While these numbers are positive, they are a deceleration from the last quarter of 2014. During the last three months of 2014, personal consumption expenditures grew by 4.4 percent. This past quarter, the strongest subsector of personal consumption expenditures was consumption of services, which grew at a 2.8 percent rate and contributed 1.26 percentage points to the overall GDP growth rate, or approximately 96 percent of the overall contribution of personal consumption expenditures.

Net exports were the biggest drag on growth during the quarter. The difference between exports and imports reduced the overall GDP growth rate by 1.25 percentage points. The decline in net exports was driven mostly by a dramatic decrease in the level of exports rather than a dramatic increase in imports. During the quarter, the inflation-adjustment amount of exports of goods and services declined by 7.2 percent while imports increased by 1.8 percent.

This decline is attributable entirely to a massive decline in the exports of goods (a decrease of 13.3 percent) while the exports of service actually increased (7.3 percent). This drop-off in exports shouldn’t be surprising given the strong appreciation in the dollar in recent months. A rising dollar makes U.S. goods more expensive and all things equal reduces exports. In the battle between cheap oil and a dear dollar, it looks like the dollar is winning.

Gross fixed investment was also a drag on growth during the first quarter, shaving off 0.4 percentage points from the overall growth rate. Investment in nonresidential structures, such as office buildings was a biggest drag, lopping off 0.44 percentage points. Government expenditures was also a slight drag as it took off 0.15 percentage points, with the declining centering in the state and local governments.

Should we be very concerned by the weak first quarter economic growth number for 2015? It’s just too early to tell. The numbers released today are the advanced estimates that will be revised twice before we have a final estimate. Those revisions could show a much stronger first quarter. Or a much weaker one. We just don’t know. Furthermore, there’s some evidence that the seasonal adjustments for GDP growth might be understating overall growth as economist Justin Wolfers writes in the New York Times.

At the same time, the data do show some troubling signs. Real private domestic final purchases, defined as the sum of consumption and fixed investment, is a good measure of the underlying momentum of the economy and predictive of the next quarter’s growth rate. In the first quarter, it only grew at about 1 percent compared to 4.3 percent during the fourth quarter.

So we can’t say definitely yet whether we need to be concerned about growth dipping downward. But perhaps we should get prepared to consider that possibility.

April 29, 2015

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Disaggregating Growth

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