U.S. GDP Contracts in 1Q15; Economy Halfway to a Recession This Year

U.S. GDPEarlier this year in Profit Confidential, I wrote that I wouldn’t be surprised to see the U.S. economy enter a recession in 2015. I got a lot of flak here from my fellow economists…even some of my customers thought that prediction was too far off.

But, lo and behold; we are already halfway there.

On Friday, according to the revised numbers, we learned that U.S. gross domestic product (GDP) contracted at an annual rate of 0.7% in the first quarter of 2015. The technical definition of a recession is two back-to-back quarters of negative GDP. We’re halfway there, dear reader. (Source: U.S. Bureau of Economic Analysis, May 29, 2015.)

U.S. Economy Contracted in Q115; Here Are the Reasons Why

At the very core, the GDP report by the Bureau of Economic Analysis (BEA) confirmed what I have been saying all along—there’s no economic growth in the U.S.

Consumption, hands down the biggest part of the GDP calculation, is suffering. In the first quarter, it increased by just 1.8%. In the fourth quarter, it increased by 4.4%.

Exports declined 7.6% in the first quarter. In the previous quarter, exports from the U.S. were up 4.5%. You can thank the strong U.S. dollar for this; this shouldn’t be “news” to my readers as I have been warning of this.

Inventories in the U.S. continue to increase, too. In the first quarter, business inventories increased by $95.0 billion. In the fourth quarter, they were up by $80.0 billion; in the third quarter, they were up $82.2 billion. Here’s the real kicker: if you take out the build-up in inventories, U.S. GDP numbers look a lot worse.

Where’s the Economy Headed Next?

Economists and analysts are starting to aggressively lower their expectations for U.S. growth this year. Even the Federal Reserve has come to terms with reality.

The Fed has been revising its expected growth rate for 2015. In March of 2014, the Federal Reserve said that it expected the U.S. economy to grow in the range of 3.0% and 3.2% in 2015. By December of 2014, it expected the U.S. economy to grow between 2.6% and 3.0% in 2015. In its most recent projections (March 18), the Federal Reserve said that for 2015, the U.S. economy will grow at a rate between 2.3% and 2.7%. (Sources: Federal Reserve, March 19, 2014; Federal Reserve, December 17, 2014; Federal Reserve, March 18, 2015).

Over the past year, the Federal Reserve has revised its bottom GDP growth projections by 23% from 3.0%, to 2.3% now. But the Fed keeps telling us it will start to raise interest rates this year.

I see the anticipated growth rate of many economists (include the Fed’s projections) as still far too optimistic. I will not be surprised to see the Fed’s projections revised lower again.

With all this in mind, a recession this year is becoming a very likely scenario for the U.S. economy. In fact, we are already halfway there.