4/30/14 – Weak First Quarter: A Surprise, But Not to Worry

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Apr 30, 2014 1:00:00 PM

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Economic growth came in well below expectations this morning, at 0.1 percent instead of the 1.2 percent generally expected. Ouch. Is this something we should be worrying about?

In a word, no. I wrote the other day about different ways to look at data, and this is a great opportunity to do just that. Let’s dig a bit deeper to see what this very depressing number means.

First, the 0.1 percent is a quarter-on-quarter figure, annualized, meaning that the economy was essentially flat from the fourth quarter of last year to the first quarter of this year. Here’s another way to look at it: from an exceptionally strong quarter at the end of last year, the economy managed to stay at that pace despite multiple large hits from very poor weather. In this context, flat isn’t so bad.

Along the same lines, you may remember that the GDP number can bounce around quite a bit quarter to quarter. (If you don’t, check out last year’s figures.) So let’s look at the year-on-year number—slow but much more respectable growth of 2.3 percent, which could be better but is no reason to get upset. Again, remember, this is despite the weather effects.

Diving a bit further into the numbers, major non-weather reasons for the weak performance include lower-than-expected government spending (which can be considered positive in some ways) and an unexpected decline in business investment (which can’t). A drop in exports and housing were the major weather-related factors.

If the trend of weak growth continues, we have a problem. So the real question is, does the current data suggest that? In fact, it does not. As the weather normalized in March, activity appears to have picked up substantially. Today’s ADP employment report, for example, is quite strong, and personal consumption—think consumer spending—actually came in well above expectations as well. Auto sales, another good bellwether, were at multi-year highs for March. The most current data supports the idea that this was a snowdown, not a slowdown.

At this point, we can write off the first quarter as a weather story. What we need to keep an eye on going forward is whether the negative trends look likely to outlast the bad weather. At this point, the answer seems to be no, and I expect that to continue. Things to watch are housing construction and business investment, along with exports. I will, however, be keeping an eye out to see if anything changes.

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