by Zach Bethune, Thomas Cooley and Peter Rupert
Today’s release of first quarter real GDP by the Bureau of Economic Analysis saw another weak 1st quarter, gaining only 0.2% at an annual rate. It was expected that first quarter growth would be weak but this was below most analysts estimates. They were off by about a full percentage point as the median forecast was around 1%. The first quarter of last year was forecast to be around 1.1% and the eventual revisions left it at -2.1%! It may well be that the first quarter numbers for 2015 will eventually come in negative.
While there is much discussion of the impact of a severe winter on GDP…that is only a small part of the story. The bigger issues facing the economy are declining commodity prices – particularly oil prices and the much stronger U.S. dollar as other countries try to stimulate their domestic economies. The U.S. is a big oil producing economy so the impact of lower oil prices, while helping consumers, hurts producers and has a decidedly chilling impact on investment. In the first quarter alone, twenty five central banks around the world eased their monetary policies in an attempt to stimulate their economies. The effects of these could be long lasting. The decline in investment is likely to be a long lasting drag on growth. The decline in exports is only the first wave of the impact of a strengthening dollar.
The biggest detractors from GDP growth in the first quarter were non-residential fixed investment and exports.
Nevertheless, the U.S. has an interest in other countries stimulating their economies. The U.S. is still the strongest game in town. Europe and Japan have continued to lag far behind in the recovery from the financial crisis – a fact the following graph makes very clear. But this tolerant stance will become more difficult to maintain when the Fed begins the cycle of raising interest rates later this year. That will undoubtedly strengthen the dollar further and raise questions about the unsynchronized nature of monetary stimulus among developed economies. So what does all this mean for the Fed and the future of policy? With such a weak reading for GDP and with the Atlanta Fed’s GDPNow forecast of just 0.9% growth for the second quarter likely means liftoff is likely not in the cards for the next couple of meetings at least.