Today’s big headline is that U.S. economic growth came in at 0.2 percent for the first quarter of the year, well below already depressed expectations. In line with yesterday’s post, is this a sign of slowing growth?
To answer that question, we need to understand why growth slowed so much, what caused the slowing, and whether it’s likely to continue for the rest of the year.
There were four big drags on Q1 GDP growth:
- Slowing growth in consumption, or consumer spending, which dropped to 1.9 percent from 4.4 percent in the previous quarter
- A massive decline, of 23.1 percent, in business investment in nonresidential structures
- A drop in exports, of 7.2 percent, while imports rose by 1.8 percent
- A decline of 0.8 percent in government spending
Let’s look at each of these factors in a bit more detail.
The decline in consumer spending growth was surprising, coming even as Americans saw substantial increases in disposable income as a result of declining gas prices. But people chose to save the money rather than spend it. Considering what this means for the rest of the year, several points stand out:
- First, spending did indeed grow, despite the coldest winter on record for the Northeast and a shortage of goods for sale due to the West Coast port strike. Lower growth is not the same as a decline.
- Second, a lag in reacting to lower gas prices is absolutely normal. Historically, we will get longer-term gains (over the next 6 to 12 months) as consumers get used to the lower prices.
- Third, a higher savings rate is a short-term headwind, but it lays the foundation for faster growth in the long term.
I see no reason that the results from the first quarter spell long-term problems.
The decline in business investment is also potentially a short-term pain/long-term gain situation. Oil companies have significantly slowed their drilling investment, knocking about 0.8 percent off economic growth, and that will probably continue in the second quarter. Longer term, however, the lower oil prices will benefit all consumers and all companies, with gains over time.
This, too, looks like a short-term adjustment that will eventually be beneficial, not a negative structural shift.
The decline in exports is tied to the strong dollar. The dollar popped in the first quarter, and although it may continue to appreciate, it’s unlikely that appreciation will be as strong for the rest of the year. This will be an ongoing headwind, true, but it’s due in large part to the strength of the U.S. economy. Plus, it also has offsetting longer-term benefits, such as attracting foreign capital to the U.S. and helping to keep interest rates lower than they would be otherwise.
The final negative factor for Q1 GDP was a decline in government spending. We can chalk this up to declines in defense spending, which is unlikely to be structural, and in local government investment, which over the past several years has shown a pattern of declining in the first quarter before bouncing back in the second.
Look at it this way . . .
Overall, after examining the reasons for lower growth, most appear to be reasonably short term in nature and not structural. In fact, several come with benefits that should show up in the next couple of quarters.
Another way of looking at the first quarter this year is to compare it with last year. Rather than a decline, we saw actual growth. Rather than preceding quarters being disappointing, we’re coming off of three strong quarters. Once again, this looks like a snowdown, not a slowdown. By reacting to the short-term negatives while ignoring the longer-term positives, we’re missing the bigger picture.