This morning, the Bureau of Economic Analysis reported that U.S. real gross domestic product (GDP) increased 0.2% in the first quarter of 2015. This is 80% lower than the already dismal 1.0% estimate. Comparing this with the 2.2% growth rate in the fourth quarter of last year, we can see that the U.S. economy is slowing down quite abruptly.
U.S. GDP: Investments Down, Exports Tumbling
Looking at the individual components of the GDP numbers reveals more signs of worry. Business investments declined sharply. Investment in non-residential structures tanked 23.1% in the first quarter, compared to 5.9% growth in the fourth quarter of last year.
Net exports are not helping either. Real exports dropped 7.2% in the first quarter, while imports increased by 1.8%. A stronger U.S. dollar certainly played a role in this. But you could also blame it on the sluggish growth in world economy: China is slowing down and the eurozone is a mess. There is simply not enough demand for U.S. goods and services under a strong dollar and a weak global economy.
Some analysts are blaming the slowdown in U.S. GDP growth on cold weather. They claim that the harsh winter discouraged consumer spending and business investments. This is not true. According to NOAA’s National Climate Data Center, the previous winter was actually the 19th-warmest of the past 120 winters in the contiguous United States. Moreover, the average temperature in the country was 2.1 Fahrenheit higher than the average over the entire 20th-century. A few winter storms cannot be the sole cause for the U.S. economic slowdown.
U.S. GDP Slowdown: Already Foreshadowed by March Job Report
The disappointing numbers in the first-quarter U.S. GDP growth should not really be a huge surprise. The March job report showed that the U.S. labor market added the least amount of jobs since December 2013. Moreover, the jobs added were mainly in low-paying sectors such as retail trade and restaurants. There is also serious underemployment—6.7 million people wanted to work full time but were only able to find part-time jobs.
With stagnant wages and shorter hours, the U.S. workforce faces tight constraints on its income. Without growth income, consumption is hard to grow. In a country where two-thirds of its GDP comes from consumption, the dismal job market report should have prepared us for the 80% lower-than-estimate growth rate in GDP.
Unfortunately, the worst is yet to come.