The Home Buyer's Korner

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May 30th, 2015

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First-Quarter 2015 Gross Domestic Product

Good and Bad GDP

The economy got off to an even worse start this year than first reported.  Economic activity contracted due to dismal trade performance and continued caution by businesses and consumers alike.

The 0.7 percent annual rate of decline in economic output in the first quarter of 2015 was a reversal of the initial 0.2 percent advance for the period posted in our blog late last month.

One-time quarks like harsh winter weather in some parts of the country played a role, as well as a work slowdown at West Coast ports, but the revised GDP underscores the American economy’s continuing inability to generate much momentum, not to mention how a strong U.S Dollar isn’t helping us export goods and services.

The most recent revised GDP was the third time that economic activity had posted a quarterly contraction since the so called recovery began in mid-2009, with declines in output in the first quarters of 2011 and 2014.

Much of the revision reported last week came from new data showing that exports fell more than first thought and imports rose. The change in the trade balance shaved 1.9 percentage points off overall growth last quarter and was the largest quarterly drag from net exports in three decades!

Exports had been a particularly bright spot for the American economy at least for Wall Street in the first years of the so called recovery, as world trade rebounded from the plunge that followed the financial crisis in late 2008 and early 2009. Those gains have slowed recently, and are likely to remain under pressure as the stronger dollar makes American goods more expensive for overseas buyers.

The weak start for the year is a crucial reason that the Federal Reserve has pulled back from any plans to raise short-term interest rates in June, with officials now suggesting that the first rate increase from near zero is not likely to come until September or even later this year.

After the economy grew at an annual rate of nearly 5 percent in the spring and summer of 2014, some experts concluded that the economy had found its footing and predicted that a healthier, sustained growth rate of near 3 percent was finally at hand. So much for the experts!

The new data for the first quarter of 2015, and signs of only a tepid rebound in the current quarter, are forcing some economists to rethink earlier assumptions.

More economist are coming around to the view that the long-term growth rate of the American economy is 2 percent, at best.

Although I think the economy is dismal this far out from the great recession, most economist don’t think it’s particularly dark. They point to unemployment steadily falling, and some think it could be near 5 percent by the end of the year, from 5.4 percent now. They also want look back at the jobless rate which stood at 8 percent a little over two years ago, but many folks simply aren’t being counted anymore.

Other economist like to tell us that real estate market is robust, although talking to foot soldiers like real estate agents and loan officer you wouldn’t hear such a rosy statement. Finally many economist point to recent indices like pending home sales last month hitting a nine-year high and  new-home sales, but those of us in the industry know there are problems in these reports and subject to revision.

Despite the windfall provided by lower gasoline prices, consumer spending, which accounts for roughly two-thirds of economic activity, was only modest. Personal consumption rose by 1.8 percent last quarter, down from 4.4 percent in late 2014.

Experts say some of the weakness in the first quarter of the year reflects how the numbers are analyzed by government statisticians to account for seasonal variations, like the retail slowdown that follows the holiday shopping season or business activity that is lowered as temperatures plunge.

That process, known as seasonal adjustment, may indeed have exaggerated the underlying weakness last quarter. However, whatever role that seasonal adjustments did play, I wouldn’t dismiss our first-quarter weakness. In my opinion the Federal Reserve needs to focus all its attention on the dollar’s surge against foreign currencies like the euro rather than concerning itself with raising interest rates on Americans, as the strong U.S Dollar is hurting manufacturing and other exports.

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