The Bureau of Economic Analysis said the U.S. economy contracted in the first quarter for the second year in a row. Real GDP shrank by 0.7 percent in the first quarter, according to the latest revision. It was originally reported to be a gain of 0.2 percent. Overall, these data continue to show the effects of strong headwinds on the economy and for manufacturers in the early months of 2015. These challenges have included weaknesses abroad, a strong U.S. dollar, lower crude oil prices, the residual effects of the West Coast ports slowdown, bad weather in some regions of the country and a still-cautious consumer.
The largest declines came from net exports, which subtracted 1.90 percentage points from real GDP in the first quarter. Goods exports plummeted 14.0 percent for the quarter, with goods imports up 5.1 percent. International demand for manufactured goods exports have been hampered the stronger dollar and weaker-than-desired economic growth in key markets. Net exports have been a drain on growth in four of the past five quarters.
The weaknesses in the trade data further highlight the importance of exports to the U.S. economy and the necessity of seeking pro-growth measures to increase our global competitiveness. It is the reason why we need to advance pro-trade policies like Trade Promotion Authority, which would help open foreign markets where 95% of the world’s consumers live, and reauthorize the Export-Import Bank (Ex-Im). Should the Ex-Im expire, U.S. manufacturers would forfeit growth opportunities in some of the world’s fastest growing economies. Manufacturers will emphasize these priorities and others, next week in Washington, D.C., at the 2015 NAM Manufacturing Summit.
Beyond the global environment, domestic consumer and business spending have also been soft. Consumer spending on goods was up only 0.5 percent. Businesses also spent dramatically less on nonresidential structures, with equipment spending slowing to a crawl. Much of this could stem from reduced investments due to current energy prices. In total, nonresidential fixed investment fell 2.8 percent, its first quarterly decline in four years, led by a whopping 20.8 percent decrease in structure spending. On the positive side, personal consumption and gross private domestic investment added 1.35 percentage points to the headline number (down from 1.65 percent in the original estimate). However, much of this was due to increased spending on consumer services, particularly for housing and utilities and health care.
Government spending subtracted 0.20 percentage point from growth. Federal defense and state and local government spending were down 1.0 percent and 1.8 percent, respectively, in the first quarter. Each was slightly worse than previously reported.
Overall, this was a disappointing start to the new year. That is particularly true when you look at the optimism that so many businesses had at the start of 2015. Yet, it is clear that manufactures faced a number of significant headwinds that combined to slow the growth of demand and production. Still, manufacturers are cautiously upbeat about the coming months. I now expect real GDP growth of 2.4 percent for 2015, with growth in the second quarter of roughly 2.8 percent. That suggests modest growth moving forward, but also some disappointment after manufacturers were hoping that this would finally be the year that we would get some traction in the economy.
Chad Moutray is the chief economist, National Association of Manufacturers.
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