First, it was unexpectedly low growth of only 0.1% q/a, then the numbers were revised down to show the U.S. economy contracting. Some economists claim the drop in the U.S. Q1 GDP is a minor blip, but it’s not altogether clear how the U.S. will bounce back…
Is the US economy on the cusp of great growth? Or is it being pulled back into a morass of recession?
That debate has been reignited today as it was revealed that the US economy, which is supposed to be growing more robust, actually contracted in the first three months of the year, according to the Commerce Department. The sharp pullback – which would equal a 1% loss to economic power if extrapolated over the year – is the first major economic contraction since 2011. Another measure, gross domestic income, also fell sharply after years of growth.
The clearest reaction that sums it all up came from Pantheon Macroeconomics founder Ian Shepherdson in a note to clients on Thursday: “Ouch”.
The discussion is a weighty one. GDP, a measure number-crunched by the Commerce Department every three months, is the economic data point that policymakers most trust to gauge the health of the US economy. It takes into account everything from goods bought and sold to business investment to trade and export.
It’s also a political football. The growth of the economy could prove an influential data point in the midterm US elections this fall, in which the White House will want to show the economy is improving in order to win more seats for Democrats. Many Democrats and partisan economists, including Paul Krugman, have argued that the batch of austerity measures passed over the past three years by the US Congress would hurt economic growth.
As a result, a scrum of economists and pundits tried to make sense of the sharp, unexpected drop in growth, offering competing narratives around what it means. Many economic experts waved away the fall in GDP away as an anomaly, but did not offer much in the way of explanation about where future growth would come from.
The most popular conclusion among economists writing on Thursday was that GDP was hit by a short-term decline in inventories stocked by businesses during the first three months of the year. Inventories rose by only $49bn in the first quarter, not $87.4bn as previously thought, when GDP numbers were first announced in early May.
Yet inventories aren’t a completely neat explanation. The Federal Reserve, analyzing the numbers last month, attributed the decline to a decrease in net exports and the effect of bad winter weather, both of which may have also played a part. Enemies of austerity may also note that local government spending also dropped, contributing to that lower economic growth number.
In fact, many experts saw the drop in GDP as a good sign – interpreting it as proof that the economy is cleaning out all the dross before bouncing back, bigger than ever, in just a few months.
“First-quarter real GDP growth was revised downward,” wrote Doug Handler, chief economist of IHS Global Insight. “However, the nature of the revisions helps build the economic case for much stronger growth in the second quarter and through the remainder of the year.”
Others took it further. Goldman Sachs economists predicted in an outlook on May 9 that the economy would grow at a whopping 3.5% in the second half of the year, due to more consumer spending, greater housing growth, more industrial activity, and a bigger labor market.
That remains to be seen. For the time being, the fall in GDP was sufficiently surprising that some economists did not seem to believe their own eyes. Deutsche Bank’s economics team argued that the statistics will be revised twice more, on June 25 and July 30, and that the result may show better news for the economy. They seemed to see the GDP numbers as a contradiction to an overall trend in growth:
“A Q1 decline in real GDP does not jibe with some key metrics of the economy. Case in point, nonfarm payrolls expanded by +190k per month in Q1. At the same time, the ISM manufacturing survey averaged just under 53, and both retail sales (+1.0%) and manufacturing industrial production (+2.1%) eked out annualized gains in the quarter. ”
Yet others don’t seem so confident that the shoddy showing in GDP is easily dismissed. Former Federal Reserve chairman Ben Bernanke has been giving speeches telling hedge-fund managers to expect lower GDP for some time to come.
The broad-based recovery that many had hoped for has no doubt taken a hit in recent months.
For instance, inventories are only one element of GDP. Other elements of GDP that measure business confidence are only “less worse” in the words of Lindsey Group chief marketing analyst Peter Boockvar. For instance, fixed investment, which measures business spending on real estate and equipment, fell only 2.3% compared to a more recent fall of 2.8% – an improvement, but still overall, dropping.
Another aspect of economic health, housing, has also been showing weak growth, with some Fed officials “caught off guard” by the turnaround. Janet Yellen, the chair of the Fed, suggested to Congress in early May that negative housing growth could hurt the economic recovery.
And the employment picture, while apparently improving with lower jobless rates, is still very weak. The majority of jobs growth has been in low-paying part-time jobs, and over 10 million people are still out of work. In addition, labor force participation – which measures what percentage of Americans are working – has been at levels not seen since the stagnant economy of the 1970s.
In addition, it seems US households just have less to spend.
“The median annual income is 7.5% lower (about $4,309) than its interim high in January 2008,” said Sentier Research.
Many still argue for growth up ahead. But, with incomes down, housing suffering, and businesses still wary of hiring, it’s not clear where that growth will come from.
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