 "Shrugging off slow growth, Fed predicts rebound")
Repeating an all-too-familiar pattern, the American economy barely grew during the first three months of the year, but the Federal Reserve said Wednesday that it expected growth to rebound, suggesting that it still intends to start raising its benchmark interest rate this year.
Despite the Fed's optimism, a number of Wall Street forecasters cut their estimates for second-quarter growth as they concluded that the weakness, caused in part by cold weather but also by cautious consumers and the strength of the dollar, could linger.
"The US economy stumbled badly in the first quarter," said Scott Anderson, chief economist at Bank of the West in San Francisco. "Modest growth in the fourth quarter of 2014 turned into virtually no growth in the first quarter of 2015."
Weak winter growth has become a hallmark of the post-recession economy. The gross domestic product expanded just 0.2 per cent during the first quarter, according to an initial government estimate published Wednesday morning.
Strong job growth during the first two months of the year was followed by a disappointing increase of 126,000 jobs in March, and the Fed, in a statement after a two-day meeting of its policy-making committee, said labor market conditions had not improved over the last month. The federal government is scheduled to release an initial estimate of April job growth on May 8.
Inflation also remains sluggish. Although concerns about deflation have subsided, price inflation remains well below the 2 per cent annual pace the Fed regards as healthy. Wages also continue to rise slowly, notwithstanding a recent spate of headlines as large employers like Walmart have announced modest increases.
The Fed's statement, however, described the latest round of economic setbacks as likely to be temporary. Officials hope that this year will follow the pattern of last year, when strong summer growth offset an even weaker first quarter.
"Although growth in output and employment slowed during the first quarter, the committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace," the statement said.
The Fed did not directly address when it might start to raise short-term rates, which it has held near zero since December 2008. Officials have said they would begin to consider such an increase at the committee's next meeting, in June. Analysts generally predict that the Fed will not act before September, and possibly later.
The Fed's statement was approved by a unanimous vote of 10 to 0.
Domestic growth is being restrained by the weakness of the rest of the global economy. As the dollar has gained strength, American exporters have struggled. Foreign trade also was curtailed by the lingering effects of a labor dispute that slowed the flow of goods through West Coast ports. Net exports fell 7.2 per cent in the first quarter, shaving nearly a full percentage point off the overall growth figure.
A sharp reduction in business investment also weighed on first-quarter output, a trend that some experts attributed to big cuts in spending in the energy industry as falling oil prices prompted drillers and oil production companies to pull back. At the same time, businesses piled up inventory, which lifted the reported pace of growth but led some analysts to cut back their expectations for the second quarter.
Public sector spending posted a surprising decline. State and local government expenditures fell at the steepest rate since the first quarter of 2012.
Consumer spending has been surprisingly weak despite the drop in gasoline prices that began last summer. Such spending, which makes up roughly two-thirds of gross domestic product, rose 1.9 per cent, well below the 4.4 per cent gain in the fourth quarter of 2014.
Anderson said consumers were most likely using the windfall to pay down credit card debt or add to savings. He said he expected consumers to spend more aggressively later in the year, driving growth.
The estimate of economic growth was the first of three that the Commerce Department will release, and the number is often revised sharply. The average revision in the initial estimate is about 1.2 percentage points. The next estimate will come out on May 29.
Despite the slow start to the year, many economic forecasters share the Fed's expectation that the warmer weather will usher in better news.
"We believe weakness was grossly exaggerated, and there will be significant catch-up in Q2, but, of course, that remains to be seen," said Jim O'Sullivan, chief United States economist at High Frequency Economics in Valhalla, N.Y.
In a separate report later in the morning, the National Association of Realtors said pending home sales rose 1.1 per cent in March. Pending sales are now at their highest level since June 2013, according to the Realtors' index. Some experts say the housing market should remain strong in the next few months, especially since the Fed does not seem to be in a rush to begin increasing its benchmark rate.
But Guy Berger, United States economist at RBS Global Banking and Markets, cautioned that some of the headwinds evident last quarter would not abate immediately.
The drop in energy-related spending will eventually level out, he said, but it will take some time. And the dollar remains strong compared with currencies like the euro, so no relief for exporters is in sight.
"The dollar has strengthened so much that it could restrain the magnitude of the rebound," Mr. Berger said.
After earlier predictions that the Fed might move as early as June, most economists now say it will wait at least until its September meeting, or even later. The latest data "strengthens the argument for a delay by the Fed," Mr. Anderson said.
At the same time, however, financial markets may be exaggerating the likely delay. Fed funds futures now imply just a 26 percent probability that the Fed will raise rates by September, and only a 52 percent probability of a first increase this year, according to data compiled by Bloomberg. By contrast, last month 15 of 17 Fed officials predicted that the Fed would begin to raise rates by the end of the year.
Mr. O'Sullivan said the Fed was in a wait-and-see mode.
"They are largely discounting the weakness in G.D.P. in Q1, but they will want to see more evidence that the trend remains solid and that the unemployment rate is still declining before starting the normalization process," he said. "They are not in a rush. We continue to expect tightening to start in September."
Most analysts are focused on the September meeting because it will be followed by a regular quarterly news conference with the Fed's chairwoman, Janet L. Yellen. The Fed has tended to announce major policy changes at such meetings. But Ms. Yellen insisted at her last such news conference, in March, that the Fed could also act at its July or October meetings, when she is not scheduled to take questions.
To underscore that point, the Fed invited reporters to participate in a test of a dial-in news conference system on Wednesday afternoon that would let Ms. Yellen speak with reporters on short notice. The Fed said any such call would also be broadcast.
Despite the Fed's optimism, a number of Wall Street forecasters cut their estimates for second-quarter growth as they concluded that the weakness, caused in part by cold weather but also by cautious consumers and the strength of the dollar, could linger.
"The US economy stumbled badly in the first quarter," said Scott Anderson, chief economist at Bank of the West in San Francisco. "Modest growth in the fourth quarter of 2014 turned into virtually no growth in the first quarter of 2015."
Weak winter growth has become a hallmark of the post-recession economy. The gross domestic product expanded just 0.2 per cent during the first quarter, according to an initial government estimate published Wednesday morning.
Strong job growth during the first two months of the year was followed by a disappointing increase of 126,000 jobs in March, and the Fed, in a statement after a two-day meeting of its policy-making committee, said labor market conditions had not improved over the last month. The federal government is scheduled to release an initial estimate of April job growth on May 8.
Inflation also remains sluggish. Although concerns about deflation have subsided, price inflation remains well below the 2 per cent annual pace the Fed regards as healthy. Wages also continue to rise slowly, notwithstanding a recent spate of headlines as large employers like Walmart have announced modest increases.
The Fed's statement, however, described the latest round of economic setbacks as likely to be temporary. Officials hope that this year will follow the pattern of last year, when strong summer growth offset an even weaker first quarter.
"Although growth in output and employment slowed during the first quarter, the committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace," the statement said.
The Fed did not directly address when it might start to raise short-term rates, which it has held near zero since December 2008. Officials have said they would begin to consider such an increase at the committee's next meeting, in June. Analysts generally predict that the Fed will not act before September, and possibly later.
The Fed's statement was approved by a unanimous vote of 10 to 0.
Domestic growth is being restrained by the weakness of the rest of the global economy. As the dollar has gained strength, American exporters have struggled. Foreign trade also was curtailed by the lingering effects of a labor dispute that slowed the flow of goods through West Coast ports. Net exports fell 7.2 per cent in the first quarter, shaving nearly a full percentage point off the overall growth figure.
A sharp reduction in business investment also weighed on first-quarter output, a trend that some experts attributed to big cuts in spending in the energy industry as falling oil prices prompted drillers and oil production companies to pull back. At the same time, businesses piled up inventory, which lifted the reported pace of growth but led some analysts to cut back their expectations for the second quarter.
Public sector spending posted a surprising decline. State and local government expenditures fell at the steepest rate since the first quarter of 2012.
Consumer spending has been surprisingly weak despite the drop in gasoline prices that began last summer. Such spending, which makes up roughly two-thirds of gross domestic product, rose 1.9 per cent, well below the 4.4 per cent gain in the fourth quarter of 2014.
Anderson said consumers were most likely using the windfall to pay down credit card debt or add to savings. He said he expected consumers to spend more aggressively later in the year, driving growth.
The estimate of economic growth was the first of three that the Commerce Department will release, and the number is often revised sharply. The average revision in the initial estimate is about 1.2 percentage points. The next estimate will come out on May 29.
Despite the slow start to the year, many economic forecasters share the Fed's expectation that the warmer weather will usher in better news.
"We believe weakness was grossly exaggerated, and there will be significant catch-up in Q2, but, of course, that remains to be seen," said Jim O'Sullivan, chief United States economist at High Frequency Economics in Valhalla, N.Y.
In a separate report later in the morning, the National Association of Realtors said pending home sales rose 1.1 per cent in March. Pending sales are now at their highest level since June 2013, according to the Realtors' index. Some experts say the housing market should remain strong in the next few months, especially since the Fed does not seem to be in a rush to begin increasing its benchmark rate.
But Guy Berger, United States economist at RBS Global Banking and Markets, cautioned that some of the headwinds evident last quarter would not abate immediately.
The drop in energy-related spending will eventually level out, he said, but it will take some time. And the dollar remains strong compared with currencies like the euro, so no relief for exporters is in sight.
"The dollar has strengthened so much that it could restrain the magnitude of the rebound," Mr. Berger said.
After earlier predictions that the Fed might move as early as June, most economists now say it will wait at least until its September meeting, or even later. The latest data "strengthens the argument for a delay by the Fed," Mr. Anderson said.
At the same time, however, financial markets may be exaggerating the likely delay. Fed funds futures now imply just a 26 percent probability that the Fed will raise rates by September, and only a 52 percent probability of a first increase this year, according to data compiled by Bloomberg. By contrast, last month 15 of 17 Fed officials predicted that the Fed would begin to raise rates by the end of the year.
Mr. O'Sullivan said the Fed was in a wait-and-see mode.
"They are largely discounting the weakness in G.D.P. in Q1, but they will want to see more evidence that the trend remains solid and that the unemployment rate is still declining before starting the normalization process," he said. "They are not in a rush. We continue to expect tightening to start in September."
Most analysts are focused on the September meeting because it will be followed by a regular quarterly news conference with the Fed's chairwoman, Janet L. Yellen. The Fed has tended to announce major policy changes at such meetings. But Ms. Yellen insisted at her last such news conference, in March, that the Fed could also act at its July or October meetings, when she is not scheduled to take questions.
To underscore that point, the Fed invited reporters to participate in a test of a dial-in news conference system on Wednesday afternoon that would let Ms. Yellen speak with reporters on short notice. The Fed said any such call would also be broadcast.
©2015 The New York Times News Service