Freeze Stalls US Economy: Schroders

Keith Wade, chief economist at Schroders, comments on the latest US GDP figures.

The US economy grew by a mere 0.1% in the first quarter which, as this number is annualised, means virtually nothing. However, a weak figure was not entirely unexpected given the severe cold and snow during the quarter meant that many were unable to work or shop. In terms of the components of GDP the weather weighed on residential investment, sales of motor vehicles and exports. Each of these is expected to rebound in the current quarter and lift real GDP back to a 3% pace.

Having said that, the figure was still weaker than market forecasts as the report showed a surprise fall in business investment in equipment and only a very modest rebound in government spending after the shutdown in the fourth quarter. The weakness in investment is more troubling as we look for capex [capital expenditure] to make a healthy contribution to GDP this year and so has thus made an abysmal start.

There could be a timing issue here as the fourth quarter of last year showed a surge in spending and durable goods orders (a good leading indicator) have firmed recently. Nonetheless, we are aware that capex was a source of disappointment last year and has the capacity to disappoint again if business remains risk averse.

The bright spot was consumer spending which rose at a 3% pace, an outcome largely driven by Obamacare which led to a sharp rise in healthcare spend, a factor which will continue into the second quarter and possibly beyond as the new system seems to have revealed pent up demand in this area. There was little change in the inflation rate which remained low. On the Fed’s preferred core personal consumer deflator measure it came in at 1.4%, the same as last quarter and below the Fed’s target of 2%. 

Overall though, we would see policy as being driven by growth and unemployment, unless inflation were to drop below 1%. Friday’s payroll report will be more important in this respect.

 

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