US Economy Probably Stumbled Out of Gate (Again) in 2016

New York (Apr 27)  It was business as usual for the U.S. economy in the first quarter. The government's initial estimate of gross domestic product is projected to show a 0.6 percent annualized gain for the January-March period,  extending a pattern of early-year weakness and tied this time to tepid business investment, lackluster overseas demand and wilting domestic spending.

“I don’t think it’s too surprising that we’re off to a slow start given everything that hit the economy in the first three months of the year,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.

The figure would mark the third straight year that the economy kicked off with sub-1 percent growth.

Here's what else economists are looking for in the Commerce Department's report on Thursday at 8:30 a.m. in Washington:

Consumer spending

Household purchases — which make up the bulk of the economy — probably slowed to a 1.7 percent pace, the weakest in two years. It would also mark the third straight quarter that spending has slowed, the longest such string since 2000-2001.  In the final three months of 2015, consumer outlays rose at a 2.4 percent rate.

The slowdown is a head-scratcher considering the favorable backdrop for American households, including low inflation, cheap borrowing costs, a sturdy job market, a rebound in wealth tied to stock-market gains and warmer-than-usual temperatures. As long as employment holds up, it will probably help lead to firmer consumption and economic growth.

“But similar to how we did in the last few years, we got off to a poor start but we bounced back," Sweet said. "Ultimately, 2 percent GDP is almost a done deal."

Investment and trade

Soft orders from abroad, and the residual effects of last year's surge in the dollar and collapse in commodities prices will probably be evident in weaker first-quarter business spending.

Shipments of non-defense capital goods excluding aircraft, which are used to compile GDP, declined at a 9.6 percent annualized rate in the first three months of the year. That was the worst performance for factories since the closing months of the recession.

At the same time, a report Wednesday offered some favorable news on trade and prompted some economists to raise their GDP tracking estimates. The merchandise trade deficit shrank 10.3 percent in March from the prior month to its smallest since February 2015, according to advance data from the Commerce Department. The value of goods bought overseas dropped to a more than five-year low.

`Residual seasonality'

The tepid reading on first-quarter growth also may reflect a statistical quirk known as residual seasonality, even as the Bureau of Economic Analysis last year made adjustments to update their methodology. In four of the last six instances, the first quarter was the weakest three-month period of the year.

“The significant declines in economic activity during the Great Recession could have altered the normal seasonal patterns in such a way that it could take a few more years to get back to normal,” Bloomberg Intelligence economists Yelena Shulyatyeva and Carl Riccadonna said in a research note Monday.

Nonetheless, economists are counting on growth to spring back in the second quarter. GDP will increase 2.3 percent in the three months through June, according to the median projection of 68 economists surveyed by Bloomberg in April.

 “The employment picture seems to be suggesting growth is plodding along at a pace around 2 percent,” said David Sloan, senior economist at 4cast Inc. in New York, who sees first-quarter growth of 0.8 percent. “I don’t think we’ll see a massive rebound in the second quarter, but we probably could move a little above 2 percent.”

Source: Bloomberg