Here is the summary for this week’s Monday Economic Report:
The U.S. economy stagnated in the first quarter, with real GDP growing by just 0.2 percent. This compares to a consensus estimate of 1.1 percent, and it was lower than the 5.0 percent and 2.2 percent growth rates observed in the third and fourth quarters of 2014, respectively. As one might expect from a data point that is just shy of zero, the underlying contributions to growth were mixed. Net exports and government spending were drags on activity in the first quarter, particularly with headwinds from a stronger dollar. Consumer spending on goods and nonresidential fixed investment were also weak, with the latter experiencing sharp declines stemming from the energy market and its supply chain. The bright spots—to the extent that you could call them that—were service-sector spending and a rebound in inventories.
The latest Institute for Supply Management also reflects much of this softness. The manufacturing Purchasing Managers’ Index (PMI) was unchanged in April at 51.5, and it has generally trended lower since measuring 57.9 six months ago. Also, employment shifted negative for the first time in nearly two years. Still, there were signs of cautious optimism in the report, with new orders, exports and production growth moving somewhat higher.
Meanwhile, surveys from the Dallas and Richmond Federal Reserve Banks both indicated contracting activity levels in April. The Texas economy continues to grapple with the ramifications of lower crude oil prices. For instance, nearly 28 percent of the Dallas Federal Reserve’s respondents said conditions had worsened in April. Nonetheless, both regional surveys provided a more upbeat assessment about the coming months. Along those lines, construction spending was up 2.8 percent in March, increasing to an all-time high for the second straight month, suggesting that manufacturing leaders have enough confidence in their outlook to warrant additional construction investment.
It has been more difficult to gauge consumer sentiment in light of recent slowness in the economy, with varied news out last week. As noted above, goods spending was essentially flat in the first quarter, suggesting a high degree of caution. Personal spending figures echoed this finding; however, they also observed an increase of 0.4 percent in March, suggesting a bit of a rebound from softness during the prior months. The savings rate declined to 5.3 percent, but it continues to be higher than a few months ago, with the rate being 4.4 percent as recently as November. Likewise, consumer confidence has eased in the early months of this year after peaking at the end of 2014. The April data, however, were mixed, with the University of Michigan’s measure rebounding a little but the Conference Board’s report showing confidence pulling back once again.
If there was any silver lining to this negative news, it is the belief in financial markets that slower growth will postpone the Federal Reserve’s push for higher interest rates. For its part, the Federal Open Market Committee went out of its way in its latest statement to suggest that the recent slowdown was due to “transitory factors,” thereby keeping a possible June rate increase on the table. At the same time, the Federal Reserve will likely be looking for stronger economic data before beginning to normalize policies, making a September (or later) rate increase more probable. This perception has already impacted exchange rates, with the euro rising from a low of $1.0524 on March 13 to Friday’s close of $1.1218. However, even with some slight weakening in the dollar in recent days, it has appreciated 18.1 percent against the euro since the end of June 2014.
This week, the highlights will be on international trade and employment. On Tuesday, we will get the latest figures on the U.S. trade deficit, including manufactured goods exports, which have struggled of late on weaknesses abroad and a stronger U.S. dollar. At the end of the week, the Bureau of Labor Statistics will release April jobs numbers, which we hope will reflect a bit of a rebound after softer hiring in February and March. Other reports out this week include the most recent data points for consumer credit, factory orders and productivity.
Chad Moutray is the chief economist, National Association of Manufacturers.
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