US Watch Is the US economy derailing?
Group Economics Macro & Financial Markets Research Maritza Cabezas, +31 20 343 5618
26 May 2015
After a disappointing first quarter, we think that the US economy will bounce back. A solid labour market will in fact support growth in consumption and in residential investment, but it will take a firmer pace of growth to compensate for the drag of oil-related capital spending and exports. Our forecast was adjusted downward to reflect the acuteness of the slowdown in the first quarter. GDP growth is now 2.7%, down from 3.1% in 2015. The Fed considers the first-quarter slowdown as transitory and remains positive about the long-term economic outlook. A rate hike in September remains the most likely scenario, but this will obviously depend on whether the economy recovers convincingly after the weak first quarter.
Why has GDP growth stalled in the first quarter? There are different sources that explain the slowdown in GDP growth. The “known unknowns” are related to developments that were already ongoing in 2014, but whose magnitude was underestimated. This includes weaker investment in oil-related activities as a result of lower oil prices. The strong dollar, which was boosted by a combination of positive sentiment for the US growth outlook and looser monetary policy abroad, was also a factor. In addition, the disruptions in the west coast seaports that had been building up since fall last year escalated in January and February. This finally resulted in the closing of the major ports, with backlogs clearly moving into April. Not surprisingly, export growth faced major headwinds, but the drag was so acute in Q1 that a moderation in Q2 seems very likely. On top of this, extreme weather took again its toll on the economy, pushing down consumption and construction to similar levels as the year before. The advance estimate of Q1 GDP growth was 0.2%, down from 2.2% the previous quarter. This estimate could be revised downwards in the coming time, but we think that negative drivers are transitory and that a rebound is on the cards.
Foreign trade and investment facing headwinds contribution in %
Could uncertain statistics be pulling down GDP growth? There is a pattern of recurrent weakness in first-quarter GDP growth reported by the Bureau of Economic Analysis (BEA), which appears to be partly attributable to methodological distortions in the seasonal adjustment process. In fact, firstquarter US GDP growth from 2010 to 2014 averaged 0.6% compared to 2.9% in the other three quarters. Details on firstquarter growth suggest that this pattern of weaker growth can be found in the categories construction, federal and local government expenditures, defence spending and exports. If this residual seasonality were absent, GDP growth would be much higher.
First-quarter GDP growth could be higher in %
6 5 4 3 2 1 0 -1 -2 -3 Q1 2010
1.8%
0.2%
Q1 2011
Q1 2012
Q1 2013
Q1 2014
Q1 2015
GDP seasonally adjusted BEA
6
GDP seasonally adjusted FRB San Francisco
4 Source: Thomson Reuters Datastream, Federal Reserve Bank of San Francisco
2 0 -2 -4 Q2 2013
Q4 2013
Q2 2014
Q4 2014
Consumption
Investment
Government
Inventory
Net trade
GDP growth
Source: Thomson Reuters Datastream
The Federal Reserve Bank of San Francisco has looked into the seasonality issue. Its conclusion was that GDP growth appears to be substantially stronger than the BEA initially reported. They suggest that the very sharp drop in the first quarter of 2009 during the Great Recession potentially leads to several years of residual seasonality. This concern was already voiced by former Chair Ben Bernanke in 2010. The data corrected by the FRB of San Francisco show that published first-quarter GDP growth increases by about 1.5 percentage points. The BEA is currently reviewing their