In a disappointing first quarter, growth slowed to near-standstill
As has happened so many times since the recovery began nearly five years ago, the economy turned in another disappointing quarterly performance, surprising even the most pessimistic observers as growth in the first three months of 2014 slowed to a near-standstill.
But looking past the weak report from the Commerce Department on Wednesday morning, policymakers at the Federal Reserve said they believed that activity was already rebounding from the deep winter dive, and are sticking with their plan to gradually reduce monthly bond purchases aimed at stimulating the economy.
While that optimism was reassuring for Wall Street, which rallied after the Fed announcement, the view in the rearview mirror was as bleak as a January walk along the Hudson River. In their initial estimate for growth in the months of January, February and March, government statisticians said output expanded at an annual rate of just 0.1 percent, although experts noted that the figure was affected by onetime head winds like unusually cold weather and slower inventory gains after businesses aggressively built up stockpiles in the second half of 2013.
With more volatile factors like trade and inventory swings excluded, the pace of growth in domestic demand was about 1.5 percent in the first quarter, just slightly below where it was in the fourth quarter of 2013, while consumer spending increased at a healthy 3 percent rate.
For all the attention devoted to the quarterly fluctuations, the current underlying rate of expansion is not much different from the frustratingly slow trajectory in place ever since the economy began to recover from the Great Recession. The average quarterly rate of growth since the summer of 2009 stands at 2.2 percent.
Even if activity picks up in the current quarter and the second half of the year, said Dan North, chief economist at Euler Hermes North America, a large insurer, the annual growth rate in 2014 will most likely still be below the post-World War II average of just over 3 percent.
“We’ve been living in sub-3-percent land, and people have gotten used to that as the new normal,” North said. “But it’s not. It’s anemic.”
With midterm congressional elections on the horizon in November, the seeming inability of the economy to gain any sustained momentum also is likely to weigh on the fortunes of Democrats up for re-election on Capitol Hill, since their prospects are in many ways tied to voter attitudes toward the performance of President Obama. His poll numbers have been sinking, and although there have been some encouraging economic signs recently, like a surging stock market and a gradual fall in the unemployment rate, much of the electorate remains very skeptical that things are getting any better.
Part of the reason for that is because so much slack is left in the labor market that wage growth is only improving very slowly. For example, a separate report from the Bureau of Labor Statistics on Wednesday showed that private-sector wages and salaries in the first quarter of 2014 increased at the slowest rate since the bureau began tracking the data in 1980.
Moreover, the rebound of the housing market after the crisis in the middle part of the last decade seems to be fading. For the second quarter in a row, private residential real estate investment fell, shaving 0.2 percent off total economic growth last quarter.
“Weather was a factor, but it has become increasingly clear that the housing recovery has lost steam over the past six months, as higher mortgage rates and higher prices have weighed on buyer demand for new homes,” HSBC economist Ryan Wang said.
On Thursday, the Commerce Department will report new figures on personal income and spending in March, followed on Friday by the Labor Department’s latest data on the job market in April. The consensus among economists calls for a jump in payrolls of 215,000, with the unemployment rate falling by 0.1 percent to 6.6 percent.
On Wednesday, the payroll processor ADP said U.S. businesses increased hiring in April, adding 220,000 jobs, the most since November.