United States: Economy expands at slowest pace in two years in Q1
April 28, 2016
In the first quarter, GDP expanded at a seasonally-adjusted annualized rate (SAAR) of 0.5%, according to a preliminary estimate released by the Bureau of Economic Analysis (BEA) on 28 April. The reading fell short of the 0.7% rise the markets had expected and marked a substantial slowdown compared to the 1.4% expansion tallied in Q4. Q1’s figure represented the slowest pace of growth since Q1 2014. Q1’s disappointing result came just a few days after the Federal Reserve announced its decision to leave interest rates unchanged, warning that growth in economic activity appeared to have slowed. A year-on-year comparison showed that GDP increased 2.0% in Q1, which matched the pace seen in Q4.
Looking at the details, domestic demand growth was weaker in Q1 relative to Q4 2015, mainly due slower growth in private consumption and a deterioration in fixed investment. Private consumption increased 1.9% in Q1, which marked a deceleration over the 2.4% expansion tallied in the previous quarter. The reading suggests that, despite labor market gains, low energy prices, and higher incomes, American households were more cautious, following turbulent financial conditions at the beginning of the year. Meanwhile, fixed investment contracted in Q1, dragged by a slump in non-residential investment (Q1: -5.8% quarter-on-quarter SAAR; Q4: -2.1% qoq SAAR). The fall in investment was due in part by energy businesses cutting back on capital expenditure CAPEX due to an environment of low oil prices. A slower pace of inventory accumulation also weighed on overall economic growth in Q1. Meanwhile, positive contributions to growth came from stronger government spending as well as from residential investment.
On the external side of the economy, exports of goods and services contracted in the first quarter for the second consecutive time (Q1: -2.6% qoq SAAR; Q4: -2.0% qoq SAAR) as global demand faltered and a surging U.S. dollar continued to crush exports. On the other side of the balance, imports grew 0.2% in Q1, bouncing back from a 0.7% contraction in Q4. Consequently, net exports subtracted 0.3 percentage points from overall GDP growth in Q1 (Q4: -0.1 percentage points).
GDP quarterly growth of 0.5% at an annualized rate means that the economy virtually stalled in Q1. However, U.S. GDP data are frequently revised, as the initial estimate is based largely on data for the first two months. Given that the latest data suggest that the economy performed better in March than in January and February, an upward revision is possible in a second estimate.
Author: Ricardo Aceves, Senior Economist