U.S. First-quarter 2014 GDP Growth Slowed to 0.1% in as Poor Weather Weighed on Activity

 

Author: RBC Financial Group Economics Department
Location: Toronto
Date: 2014-04-30

  • The first estimate of US first-quarter 2014 gross domestic product (GDP) growth was 0.1%, which was down from the 2.6% and 4.1% increases in the fourth and third quarters of 2013, respectively, and well below market expectations for a 1.2% gain.
  • The downward surprise on GDP growth was despite a stronger than expected 3.0% jump in consumer spending (expectations had been for a 1.9% increase) that marked little moderation from the 3.3% increase in the fourth quarter of 2013.
  • Providing offset, net trade and inventories subtracted 0.8 and 0.6 percentage points from first-quarter 2014 GDP growth, respectively, while an expected rebound in government spending failed to materialize with the component declining 0.5% following a 5.2% plunge in the fourth quarter of 2013 related to the partial shutdown of the federal government in October. Private investment spending fell 2.8% with both residential (-5.8%) and business investment (-2.0%) declining.
  • Although notably below expectations, it remains the case that much of the slowing in first-quarter 2014 growth likely reflected the negative effect of a colder than normal winter rather than deterioration in the underlying growth rate of the economy, with some activity that otherwise would have occurred in the first quarter likely just pushed into the second quarter. Early indications, including acceleration in employment growth in February and March, as well as a sharp bounce back in auto sales in March, suggest that activity already began to strengthen later in the quarter, which would be consistent with our forecast that GDP growth will bounce back to above a 3% rate in the second quarter of 2014. Given the likely effect of weather on first-quarter 2014 growth, today’s report was still unlikely to alter the stance of Fed policy. The central bank is expected to announce another $10 billion reduction in its monthly pace of asset purchases later today although the Federal Open Market Committee (FOMC) is also expected to reiterate that it is likely that the fed funds target will be maintained in the current range of 0% to 0.25% “for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2% longer-run goal.”

 

The first estimate of US first-quarter 2014 GDP growth was an annualized 0.1%, well below 2.6% and 4.1% increases in the fourth and third quarters of 2013, respectively, and market expectations for a 1.2% increase. The downward surprise on GDP growth was despite a stronger than expected 3.0% jump in consumer spending (expectations were for a 1.9% increase) that marked little moderation from the 3.3% increase in the fourth quarter of 2013. Spending on goods increased just 0.4%, but offset was provided by a 4.4% jump in services spending. Providing offset to the gain in consumer spending, net exports subtracted 0.8 percentage points from growth after adding a percentage point in the fourth quarter of 2013 as a sharp 7.6% drop in exports outpaced a 1.4% decline in imports. Inventories subtracted 0.6 percentage points from GDP growth and private investment declined 2.8%, with both residential (-5.8%) and non-residential (-2.0%) investment falling in the quarter. An expected rebound in government spending failed to materialize with the component declining 0.5% following a 5.2% plunge in the fourth quarter of 2013 related to the partial shutdown of the federal government in October.

Growth in the core personal consumption expenditure (PCE) deflator, the key inflation indicator in today’s report, was 1.3% in the first quarter of 2014, which was unchanged from the pace of increase in the fourth quarter of 2013.

Although notably below expectations, it remains the case that much of the slowing in first-quarter 2014 growth likely reflected the negative effect of a colder than normal winter rather than deterioration in the underlying growth rate of the economy, with some activity that otherwise would have occurred in the first quarter likely just pushed into the second quarter. Early indications, including acceleration in employment growth in February and March, as well as a sharp bounce back in auto sales in March, suggest that activity already began to strengthen later in the quarter, which would be consistent with our forecast that GDP growth will bounce back to above a 3% rate in the second quarter of 2014. Given the likely effect of weather on first-quarter 2014 growth, today’s report was still unlikely to alter the stance of Fed policy. The central bank is expected to announce another $10 billion reduction in its monthly pace of asset purchases later today although the FOMC is also expected to reiterate that it is likely that the fed funds target will be maintained in the current range of 0% to 0.25% “for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2% longer-run goal.”

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

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