US Economy
US economic growth shuddered to halt in Q1 2014
By Finfacts Team
Apr 30, 2014 - 4:39 PM

Printer-friendly page from Finfacts Ireland Business News - Click for the News Main Page - A service of the Finfacts Ireland Business and Finance Portal

US economic growth shuddered to a halt in Q1 2014 making the first quarter one of the weakest paces of the five-year recovery as poor weather appeared to have stalled business investment while weak overseas demand hit exports.

Real gross domestic product -- the output of goods and services produced by labour and property located in the United States -- increased at an annual rate of 0.1% in the first quarter (that is, from the fourth quarter of 2013 to the first quarter of 2014), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased at an annualised 2.6%.

The Bureau emphasised that the first-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency. The "second" estimate for the first quarter, based on more complete data, will be released on May 29, 2014.

Business spending on items such as equipment, buildings and intellectual property fell at a 2.1% pace in the first three months of the year. That was the first decline in a year and reversed in part the 5.7% gain the prior period. The slowdown in investment coincided with weaker hiring during the quarter. US exports fell at a 7.6% pace in the first quarter. That was the largest fall since the recession ended in mid-2009.

“If health-care spending had been unchanged, the headline GDP growth number would have been -1.0%,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

First-quarter GDP highlights: The slowdown in real GDP growth reflected:

A downturn in exports: Exports of industrial supplies and materials as well as foods, feeds, and beverages declined after increasing in the fourth quarter.

A downturn in business investment: Spending on transportation equipment fell after rising significantly in the fourth quarter. Spending on computers and peripherals also turned down.

A larger decrease in inventory investment: Inventory investment by retail trade companies (mainly motor vehicles dealers) declined significantly after an increase in the fourth quarter.

A slowdown in consumer spending, mainly in nondurable goods, notably clothing and footwear as well as food and beverages. These movements were partly offset by faster growth in utilities and healthcare.

In contrast, federal government spending turned up, and imports declined after increasing in the fourth quarter.

Personal income and personal saving: Real disposable personal income (DPI)—personal income adjusted for inflation and taxes—increased 1.9% in the first quarter, compared with 0.8% in the fourth quarter of 2013. Personal saving as a% of current -dollar DPI was 4.1%, compared with 4.3%

Prof Peter Morici of the Smith Business School at the University of Maryland commented: The Commerce Department reported GDP grew at a disappointing 0.1% annual rate in the first quarter, less than 2.6 and 4.1% recorded the prior two periods. Overall, it appears 2014 may not be the breakout year President Obama and many Wall Street forecasters predicted, boding poorly for jobs creation.

A colder than normal winter slowed consumer spending, somewhat, and business investment in new equipment, structures and information technology plunged; however factors other than weather dragged on growth too.

Sequestration and the longer-term shift in federal spending from activities that support growth-infrastructure, research and development and the like-toward social welfare-health care subsidies, food stamps and the like-are depressing federal and state spending's contribution to investment and productivity and ultimately, dragging down aggregate demand and growth.

The harsh winter slowed residential sales and construction, and recent builder surveys indicate new home purchases may not rebound as strongly this spring and summer as once expected.

Young, first time buyers are caught in a vice: lower incomes than their parents enjoyed when entering the labor force and heavy college debts. Consequently, as many finally leave their parents' homes to set up households, more chose apartments. Construction costs associated with these are less than the suburban homes their parents might have purchased, and create fewer multiplier effects in the furniture, appliance and home improvement sectors. Also, apartment activity in existing cities and suburbs likely instigates less complimentary commercial development than new suburban subdivisions.

Simply, it's time for the Obama Administration to pay the piper for using student loans to prop up demand and keep young adults out of the job market to inflate growth and suppress the unemployment rate over the last five years. Fewer housing starts and more focus on lower cost units do not bode well for growth.

The boost to consumer spending provided by recovering existing home values in 2013 should slow. Speculators are purchasing fewer foreclosed properties, and higher mortgage rates raise monthly payments and reduce the prices buyers can afford.

Similarly, monthly tallies of new vehicle purchases hit a plateau last summer, when those averaged an annual pace close to 16m units. Since then sales have bounced around and not much improved. Now those are likely to rise again, but too much of Detroit's recent profitability was premised on replenishing a vehicle fleet that grew old and too fuel inefficient during the long financial crisis, easier credit conditions than are likely to persist going forward, and high mark ups on option-laden vehicles. Those have run their course, and recent downward pressures on transactions prices and profits will persist, limiting the auto sector's contribution to growth.

Preliminary data indicate the inflation adjusted trade deficit likely increased sharply in the first quarter. The cheaper yen and yuan engineered by Tokyo and Beijing, along with similar currency policies elsewhere in Asia, disadvantage US manufacturers across the board and limit jobs creation. Absent a more credible strategy from the Obama Administration to counter this protectionism, Asian governments are happy to export unemployment to the United States.

Similarly, the Obama Administration's unwillingness to approve drilling permits off the Atlantic and Pacific coasts and in the Eastern Gulf exacerbates US import dependence and increases global environmental risks by concentrating drilling too much in developing countries. These increase the US trade deficit and tax GDP growth and employment.

Halving the trade deficit by countering currency manipulation and developing more US oil could easily add 1 to 2 percentage points to annual US GDP growth, and create 4 to 5m more jobs over 3 years.

Overall, consumer spending surged to 3.3% in the fourth quarter but pulled back to about 3.0% in the first quarter, and it may not improve a lot on a sustained basis for a long time. Similarly, surging imports and slow growing exports will likely plague the economy through the balance of this year and next.

Coupled with constraints on growth in housing and autos, those factors may keep GDP growth pinned below 3% and jobs creation close to 200,000 per month, instead of the 350,000 needed to lower unemployment to pre-financial crisis levels."

© Copyright 2011 by