Another First Quarter Slowdown for the US Economy

As expected, the momentum that the United States economy had built up over the previous nine months came to a halt in the first quarter of this year, with growth slowing sharply amid a harsh winter and a number of other major headwinds.  This reflects the performance of the US economy in the first quarter of last year, when severe winter weather delayed the recovery of the US economy by three months.  Like last year, the outlook for the remainder of this year for the US economy is quite positive and growth is expected to accelerate significantly in the second quarter.  Nevertheless, for a global economy that is struggling to record higher rates of growth and is dealing with a great deal of uncertainty and risk, the fact that its strongest developed economy is underperforming is worrying news.

In the first quarter of this year, the US economy grew by just 0.2% on an annualized quarter-on-quarter basis, slightly below our forecasts.  On a year-on-year basis, the US economy grew by a very respectable 3.0%, but this reflects the strong growth recorded in the last three quarters of 2014 rather than the little growth generated in the first three months of this year.  This slowdown was the result of a number of factors.  First, consumer spending growth slowed to just 1.9% in the first quarter, despite the fact that falling gasoline prices provided major savings for US households.  This indicates that an increasing number of US consumers are choosing to increase their savings rather than to spend their money, a trend that began during the financial crisis.  Meanwhile, export growth was hurt by a combination of the strong appreciation of the US dollar against most other currencies in recent months as well as labor disruptions at ports along the West Coast of the United States.  This strong dollar has also had a negative impact on the earnings of many US-based companies, dampening business confidence levels.  Finally, falling oil prices have slowed investment and output in what was a rapidly-expanding oil and gas industry in the US, further slowing overall economic output in early 2015.

Looking ahead, the outlook for the United States economy over the remainder of this year remains very positive.  Initial indicators for April show that many sectors of the US economy are already gaining momentum, including the real estate, retail and manufacturing sectors.  This will allow for growth to pick up over the course of this year and we still forecast the US economy to grow by 3.0% this year.  Nevertheless, a number of downside risks remain in place, including the fact that the US dollar is likely to remain relatively strong over the course of this year as well as the fact that US savings rates are likely to continue to rise.  Meanwhile, the chances of an interest rate hike by the US Federal Reserve in June 2015 appear to have evaporated and it is increasingly possible that a rate hike will not materialize before the end of this year.  As such, there continues to be a degree of uncertainty surrounding the US economy and this is unfortunate news for the global economy as a whole, given the fact that most of the world’s other leading economies are currently dealing with so much uncertainty.