Growth in the first quarter fell well short of expectations, with the economy barely managing to maintain any momentum at all. GDP in the three months ending March expanded at an annualized pace of 0.2% hugely missing an expected gain of 1.0% among economists surveyed by Bloomberg. In the final three months of 2014 the economy expanded at a healthier 2.2% pace. Several red flags, in data terms, have forewarned of first quarter weakness and so the report is unlikely to cause investors major concern on the same day the FOMC delivers its latest assessment of the economy. What we do know, is that things are very likely to improve in the current quarter.
The silver lining within the report is that in the face of an improving labor market consumers continued to do what they are good at, and spent more. Elsewhere the economy struggled to advance. Indeed, had inventories not expanded as much as they did, which in itself could be a symptom of ailing demand, the economy would have contracted. In terms of the major components behind the report (C+I+G+(X-M)), Consumption (C) and Investment (I) were the only items to advance the economy.
Indeed Consumption contributed 1.3% to the headline advance of 0.2%, while Investment added 0.3%. But then we have to strip out the negative impact suffered from Net Exports (-1.3%) and Government spending (-0.2%). Short and simple, the GDP report paints a picture of the economy with an ugly stick and offers confirmation of the hampering role played by a rising dollar over the past year or so. On its own, export activity subtracted about 1.0% from the headline.
Of more concern, however, was the dip in business spending on fixed investments, which again could be a red flag over business confidence in the health of the economy. The drop in spending on this view on capital goods and commercial real estate deprived the economy of 0.4%. Investment in real estate almost failed to advance in the first quarter. Finally, government spending subtracted 0.2% from the headline measure as state and local governments spent and invested less. Meanwhile federal spending advanced only marginally.
Chart shows GDP was hurt by the strong dollar and weaker state and local government spending.