Yesterday morning the Commerce Department released its “advance” estimate of 1Q GDP, and it was quite the disappointment. According to this first estimate, the economy grew by a measly 0.1% (annual rate) in the 1Q. That was well below the pre-report consensus of 1.1% and well below the 2.6% in the 4Q of last year, which was also well below the 4.1% rate in the 3Q.
Not all the data in the report was as discouraging as the headline number. Consumer spending grew by 3.0% in the 1Q. While that was not nearly as bad as the headline number would suggest, it was still slightly below the 3.3% growth in the 4Q.
Business spending took a hit in the 1Q, falling by 2.1% as compared to positive growth of 2.7% last year. Spending on equipment plunged 5.5% in the 1Q, after rising a healthy 10.9% in the 4Q of last year. Exports fell at a 7.6% rate in the 1Q, the most since the recession ended in early 2009. The slowdown of the recovery in housing was also a drag on GDP in the 1Q.
You may recall that the economy was buoyed in the last half of last year by a significant jump in business inventories. As expected, businesses spent the 1Q working down those inventories, which was another drag on 1Q growth.
The question is, why was the report so much weaker than was anticipated? As expected, the media blamed it on the cold weather earlier this year, and that was no doubt a factor. However, it’s hard to see how cold weather in the Midwest and Northeast caused exports to plunge by $40.5 billion (7.6%) during the quarter.
The fact that growth was only 0.1% when it was expected to be 1.1% definitely raises concerns – especially in the context of 4.1% in the 3Q of last year, and then down to 2.6% in the 4Q. The trend does not look good!
The 1Q GDP number will be revised two more times in the coming weeks, analysts were quick to point out. Most expect the number to be revised higher but there’s no guarantee of that.
Apart from the disappointing GDP report, the Conference Board reported that consumer confidence remained near a six-year high in April. While the reading dipped slightly from March, it’s still the second highest reading since January 2008 at 82.3%.
A separate report showed the S&P/Case-Shiller composite index of home prices in 20 metropolitan areas rose 0.8% in February on a seasonally adjusted basis, beating the expectation for a 0.7% gain according to a Reuters survey.
So while yesterday’s GDP report was a stunner, at least all the news is not bad.
Fed’s Latest Policy Meeting – No Surprises
The Fed Open Market Committee (FOMC) meeting concluded yesterday, and there were no surprises whatsoever. The Committee voted to reduce its monthly QE purchases of bond and mortgage securities by another $10 billion, now down to $45 billion a month. This was the fourth consecutive reduction of $10 billion in purchases.
The policy statement following the meeting said that the Fed plans to continue reducing QE purchases by $10 billion at each upcoming FOMC meeting and will close out the program before year-end if the economy continues to recover. Again, no surprise there.
The statement repeated the Fed’s commitment to keeping the Fed Funds rate near zero for “a considerable time after the asset purchase program ends.” Earlier this year Chair Yellen hinted that the Fed might start raising the Fed Funds rate around six months after QE purchases end.
The statement was more optimistic on the economy: “Information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions.”
All in all, the Fed’s latest policy statement was a yawner, and there was not a big reaction in the markets, although the Dow Jones managed to close at a new record high.
The only question now is, will yesterday’s lousy GDP report cause Yellen & Company to rethink their commitment to winding-down QE at their next policy meeting on June 17-18? We’ll see.
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