U.S. Economy Sputters In First Quarter
Economic growth in the first quarter was so weak, we nearly fell into a recession.
After a fourth quarter that ended up being better than expected, initial reports seem to indicate that economic growth was basically non-existent in the first three months of 2014:
The American economy slowed drastically in the first quarter of 2014, as wintry weather depressed corporate spending and housing sector activity, while weak exports and smaller additions to inventories by businesses also held back growth.
At an annualized rate of 0.1 percent, the pace of expansion in January, February and March was the weakest since the fourth quarter of 2012, when output also barely grew. It also represented a sharp deceleration from the level of growth recorded in the second half of 2013, when the economy expanded at a 3.4 percent rate.
The first-quarter pace also fell well short of the 1.2 percent rate of growth expected by Wall Street economists before the Commerce Department announcement Wednesday morning.
Still, most economists expect that many of the headwinds evident in the first quarter will fade over the course of 2014, and the growth rate will return to a range between 2.5 and 3 percent. In addition, Wednesday’s report is the first of three estimates of growth by government statisticians, and the final figure could ultimately be revised substantially in either direction.
In some recent quarters, inventory swings have had an outsize effect on the overall growth number, and that was the case again in the first few months of 2014. But much of the first-quarter weakness tied to stockpiles is payback from huge inventory gains in the second half of 2013, rather than a fundamental sign of fragility.
The weakness in inventories reduced the growth rate by 0.6 percentage point, while weaker exports shaved 0.8 percentage point off the number. By contrast, exports added nearly added a full percentage point to output in the fourth quarter of 2013.
Even if growth does pick up later this year, the rate will still most likely be below the postwar average of just over 3 percent, said Dan North, chief economist at Euler Hermes North America, a larger insurer.
“We’ve been living in sub-3 percent land, and people have gotten used to that as the new normal,” Mr. North said in an interview before the Commerce Department announcement. “But it’s not. It’s anemic.”
Even as businesses pulled back, consumer spending actually remained reasonably healthy, rising 3 percent.
The Wall Street Journal has more detail, and is one of many media reports to point to the unusually cold, snowy winter as one explanation for the downturn in economic activity, however many of the areas that saw significant downturns are ones that should not have been impacted by weather:
The report offered the first official gauge of the economy’s output from January through March, months that were abnormally cold in much of the country. The weather likely slowed consumer spending on goods, which rose at a mere 0.4% pace during the quarter. But households spent more on services—including energy to heat their homes and health care—causing total consumer consumption to rise at a 3.0% pace, only slightly below the fourth quarter’s 3.3% rate.
However, business spending on items such as equipment, buildings and intellectual property fell at a 2.1% pace in the first three months of the year. That was the first decline in a year and reversed in part the 5.7% gain the prior period. The slowdown in investment coincided with weaker hiring during the quarter.
U.S. exports fell at a 7.6% pace in the first quarter. That was the largest drop since the recession ended. Declining exports show that shaky economies in Europe and Asia are generating weak demand for U.S. goods and services. Imports into the U.S. declined at a 1.4% pace, reflecting weaker consumer demand for foreign goods.
The latest numbers continue a familiar pattern. The nation’s economic recovery, which started in mid-2009, has been marked as much for its choppiness as its slow pace.
At several junctures, consecutive strong quarters have raised hopes for a breakout—only to be upended by a slowdown. The overall gains have been too weak to push the unemployment rate back in line with historical norms. The unemployment rate in March stood at a still-elevated 6.7%.
Furthermore, Neil Irwin notes that there are more fundamental reasons for the slowdown:
In short: Business investment is no longer a significant driver of the expansion. And nothing else (government spending, trade, housing) has emerged to replace it.
Personal consumption, the biggest component of G.D.P., has been the mainstay of this expansion, growing steadily every quarter, driven by Americans’ appetites for goods and services. Personal consumption has risen by at least a 1.5 percent annual rate for 17 straight quarters. It shows no signs of faltering.
Business investment, meanwhile, contributed quite a lot to growth from 2011 to 2013, as companies increased their investments. Companies have been adding buildings, buying new equipment and acquiring new software packages strongly enough that such investment contributed 0.84 percentage points to growth in 2011, almost precisely the same as in 2012. The contribution shifted down to a third of a percentage point in 2013.
In the first quarter of 2014, however, the corporate sector was a net negative for the economy, with investment in structures, equipment and intellectual property falling at a 2.1 percent annual rate, enough to subtract a quarter of a percentage point from overall G.D.P. That was surely in part caused by the harsh winter weather, but the basic trend is real: American business, once a major driver of the expansion, no longer is.
It’s worth noting, of course, that his is the first of three estimates of economic growth in the first three months of the year, with additional estimates coming out at the end of May and June respectively, however it seems unlikely that the revisions will be significant enough to push back the conclusion that the economy was essentially flat, if not near a recession during the first three months of the year. What that means going forward, though, is unclear. Current estimates call for the economy to bounce back as we go through they year, to the extent that economic growth between 2.5% and 3% counts as “bouncing back,” of course. As it is, we’re likely to be caught in the same pattern we’ve been in for years now, with the economy expanding enough to avoid stagnation or recession, but not nearly enough to create the kind of growth that we really need, which means sustained GDP growth well north of 3% annually. That doesn’t appear to be the world we’re living in anymore, though.
Exactly. Since the depths of the recession, we’ve experienced slow, if unspectacular, growth, and a slow steady decline in the unemployment rate. Also, the housing market has largely rebounded from the 2008-09 catastrophe, although in many parts of the country the market value of housing has not regained the valuation lost in the crash.
Ace of Spades offers the following take:
First Quarter Of ObamaCare Sees Health Care Spending Increase At Fastest Rate Since 1980 And As A Bonus, GDP “Growth” Screeches To A Halt
Doug, you publish this same piece every time GDP numbers come out. And you’re going to get the same abuse for it. You could avoid some of the abuse by suggesting something useful we could do about it. Or are you completely invested in the idea of structural change in the economy, therefore this is as good as it gets? In which case a) you’re wrong, and b) it wouldn’t be Obama’s fault, would it?
I’m concerned about the GDP numbers, but not terribly worried. 2013 Q4 came in initially as *negative* growth didn’t it?
@gVOR08:
Douyg can’t suggest something useful because the obvious suggestion-renewed stimulus-is heresy, according to conservative-libertarian dogma.
This does seem to suggest that increased government spending could be used to help drive the economy, doesn’t it?
Here is more of what Irwin said:
So according to Irwin, decline in government spending was a drag on the economy. Doug, doesn’t believe that, of course, so he leaves that out.
Still, the economic forecasters do point to growth picking up later this year. As growth picks up, look for the Obama Administration’s and Democrat’s prospects to get better.
Meanwhile, it would be good IMO if the Administration points to the slow growth and urges another round of stimulus, while painting the Republicans as “do nothings”.
@Hal_10000: First release +3.2%, second release +2.4%, third release +2.6%.
@Hal_10000: I want to say you’re off by a year, but I honestly don’t pay enough attention to the GDP numbers every time they’re released.
@stonetools: We don’t need renewed stimulus, at least not in the form of a big, one-time package of government programs. We need revenue increases and increased government spending in the budget. Some sort of continual aid to states to allow them room to keep paying civil servants.
What we need is exactly what we’ll never get. I’d say why, but I don’t feel like playing the broken record.
@gVOR08:
Consistency isn’t something conservatives are big on. Doug clearly thinks that there is something the government should be doing to improve the economy, else he wouldn’t be making these posts. Yet he certainly is coy on what that something could be.
It’s the best of all possible worlds. He can blame Obama for not doing something to improve the economy, while not saying what that something could be. Since he doesn’t suggest a remedy, we can’t actually criticise or even discuss his proposed remedy. And on the third hand, he can fall back on “Nothing will work anyway, because it’s all structural, man.”
This is what Fallacy Man would call Kettle Logic
@Tillman:
Why do we need to remove money from the private sector?
@Dave Schuler: We’ve seen in the last three years what the private sector can accomplish with government underwriting the debt in the Federal Reserve but not spurring any demand. Companies are still sitting on large cash reserves even after the abatement of the credit crunch, scared that they might not be able to meet their obligations should another one happen.
As Adam Smith said, “It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country.” When the private sector has wealth it does not wish to use, what else is to be done with it?
@Tillman:
You’ve answered my question without answering it. For the economy to expand private borrowing or government borrowing must expand. Taxing the private sector to increase government spending won’t produce economic growth. That’s fundamental Keynesian economics. Keynesian pump-priming is even more difficult when we import so much of what we consume.
If we support Keynesian policies, we should want to expand public credit so the money can be used to encourage the private sector to grow.
If you want large corporations to stop “sitting on large cash reserves”, you should probably favor a reduction or elimination of the corporate income tax rather than increased government revenue. That might do something and something is better than nothing but I’m not particularly sanguine about it. For increased business spending to cause growth here the money would need to be invested here and it would need to be invested in something other than financial instruments.
@Dave Schuler:
How does that work out? I was under the impression that while we had one of the highest nominal rates in the world, the actual amount of tax was usually much lower due to deductions.
Further, as Irwin’s article notes, the lack of government spending has actually be a drag on economic growth.
Many people have seen more than a flat personal economy. Those who have managed to scrounge out some sort of job have found that pay and benefits are less. They have also been hit with higher food prices (beef, vegetables, Doritos) and the creeping gas prices.
@Pinky:
I stand corrected. I do remember we have had at least one quarter recently that came in at negative GDP growth but can’t seem to find the details.
@Tyrell: Ah, yes, beef and Doritos. What are these ve-ge-tab-les you speak of? Are they flavors of Doritos? Flavors of beef?
@ Tyrell
Doritos are food?
@Tyrell: I did some digging. Vegetables are things like beans. So why didn’t you just say “coffee”?