The U.S. economy slowed to a crawl at the start of the year as businesses slashed investment, exports tumbled and consumers showed signs of caution, marking a return to the uneven growth that has been a hallmark of the nearly six-year economic expansion.
Gross domestic product, the broadest measure of goods and services produced across the economy, expanded at a 0.2% seasonally adjusted annual rate in the first quarter, the Commerce Department said Wednesday. The economy advanced at a 2.2% pace in the fourth quarter and 5% in the third.
Economists surveyed by The Wall Street Journal had expected growth of 1% in the first three months of this year, though many were braced for a surprise to the downside.
The latest reading on the economy came hours before Federal Reserve officials released their policy statement, in which they said slower growth reflected, in part, “transitory factors.” The Fed gave no new explicit clues on the timing of interest-rate increases, but the slower growth made the timing a bit more uncertain.
The first-quarter figures repeat a common pattern in recent years: one or two strong readings followed by a sharp slowdown. First-quarter GDP growth had averaged 0.6% since 2010 and 2.9% for all other quarters. That has worked out to moderate overall expansion but no growth breakout.
“This is another quarterly number which confirms the long-term slow-growth thesis, but there are good odds we get a bit of a bounce later in the year from stabilized business spending and the housing markets, which are setting up quite promising,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, said in a note to clients.
Last year, economists pinned much of the blame for a bad first quarter – GDP shrank 2.1% – on unusually harsh weather. This year, multiple factors appear to be at work, including another bout of blizzards, disruptions at West Coast ports, the stronger dollar’s effect on exports and the impact of cheaper oil.
Better weather, a return to normal at port terminals and steadying investment could boost growth later this year.
“We expect the economy will rebound in [the second quarter] and beyond, similar to last year,” said Michelle Girard, economist at RBS Securities.
But not all the factors behind the slowdown appear temporary. A stronger dollar and cheaper oil could persist, keeping exports and energy-sector investment at bay.
As well, rising inventories kept the U.S. economy out of recession, contributing 0.74 percentage point to GDP in the first quarter. A second-quarter repeat is unlikely.
Joseph LaVorgna, chief U.S. economist at Deutsche Bank, said producers probably will allow inventory positions to run off rather than building them up even more. “This tells us that current-quarter growth is likely to run around 2.5%, not the 4% snapback we had previously been anticipating,” he said.
U.S. households will have to pick up spending to help the economy grow. Wednesday’s report showed consumer spending, which accounts for more than two-thirds of economic output, decelerated to a 1.9% pace in the first quarter, down from 4.4% growth in the fourth quarter.
Rather than using savings from cheaper gasoline to buy more goods and services, Americans have been setting money aside for a rainy day. The personal saving rate at 5.5% in the first quarter was the highest since 2012. The figure was 4.6% in the fourth quarter.
Another key driver of the economy, business spending, also has faltered of late. Nonresidential fixed investment – which reflects spending on software, research and development, equipment and structures – retreated at a 3.4% rate, compared with a 4.7% rise in the fourth quarter.
Energy companies in particular are feeling the effects of cheaper oil. Business investment in structures fell 23.1%, led by a 48.7% contraction for mining sector spending on shafts and wells, Commerce said.
A stronger dollar, meanwhile, has made domestically produced goods more expensive overseas and foreign products cheaper inside the U.S. Combined with disruptions at West Coast ports, trade was constrained. In the first quarter, exports fell at a 7.2% rate, compared with 4.5% growth in the fourth quarter. Imports rose 1.8%, compared with 10.4% in the fourth quarter.
Federal government spending added little to the economy in the first quarter, expanding 0.3%, compared with a 7.3% fall in the fourth quarter.
Real final sales of domestic product, a measure that excludes changes to inventories, shrank at a 0.5% pace, compared with a 2.3% rise in the fourth quarter.
Alongside weak growth in the quarter, prices fell.
The price index for personal consumption expenditures – the Fed’s preferred measure for inflation – declined at a 2% annual rate, well below the central bank’s 2% inflation growth target. Core prices, which exclude volatile food and energy components, were up 0.9%, the lowest level since 2010.