While many analysts expected economic growth to be weak in the first quarter, no one expected it to be as weak as it actually was.
The Bureau of Economic Analysis (BEA) “advance” estimate for the gross domestic product (GDP) growth rate in Q1 reported a rate of 0.5 percent for the quarter. And while Q1 has had its problems in recent years—the GDP grew at only 0.7 percent for the first quarter of 2015, then shot up to 3.9 percent for Q2—none were expecting it to be that low.
GDP growth was 1.4 percent in the fourth quarter of 2015.
According to the BEA, the slow Q1 GDP growth reflected a larger decrease in nonresidential fixed investment, a deceleration in personal consumption expenditures (PCEs), a downturn in federal government spending, an upturn in reports, and larger decreases in primary inventory investment. These factors were partially offset by an upturn in local government spending and an acceleration in residential fixed investment, according to the BEA.
“Our forecast was about 0.7 growth and it came in at 0.5,” said Fannie Mae Chief Economist Doug Duncan. “People's expectations had adjusted toward that. The good news in there was that housing actually increased its contribution, and that's consistent with our forecast. The thing I think people continue to be disappointed with is the consumption numbers and the business fixed investment numbers were quite weak. That's actually not surprising, given that corporate profits have fallen over the last several months, and companies typically don't invest when profits are falling.”
Duncan added that is a risk component of the economic picture going forward, there is a “pretty high correlation between a decline in profits and a recession, even though most people don't have that in their forecast at the moment.”
With the GDP growth that low, is a recession in the cards for the near term? Capital Economics said the likelihood is low.
“Following on from the 1.4 percent gain in the final quarter of last year, (growth of less than 1 percent) suggests the U.S. economy lost more momentum and could be headed for a full-blown downturn,” Capital Economics said in a recent report. “The risk of a recession this year is still relatively low, however, particularly as the improvement in the activity surveys points to a rebound in GDP growth soon.”
There will be two more estimates for Q1 GDP growth; one will be released in late May and one in late June.