GDP expanded at an annual rate of just 0.2 percent in Q1 as the pace of growth decelerated for the second consecutive quarter. Analysts believe the Q1 slowdown largely reflects temporary factors, such as harsh weather and a labor dispute at West Coast ports that hampered exports and delayed deliveries to factories and retailers. Other economic headwinds could linger, however, including a strong dollar that's making U.S. goods more expensive for foreign buyers and a pullback in energy company investment amid a plunge in oil prices. The industrial production index in March declined for the third time in the past four months but was up slightly from the prior year. The service sector index for April increased for the 63rd consecutive month, while durable goods orders increased significantly in March. Furthermore, the Small Business Optimism Index edged up in April to 96.9; however, the Index hovers slightly below readings that have normally been associated with expansion and below its pre-recession average of 100 from 1973 through 2007.
According to the advance estimate, real gross domestic product or GDP (the output of goods and services produced within the U.S.) expanded at an annual rate of just 0.2 percent in Q1 as the pace of growth decelerated for the second consecutive quarter. GDP had expanded by 2.2 percent in Q4 and by 5.0 percent in Q3, which had marked the fastest pace in 11 years (since Q3 2003). Analysts say the Q1 slowdown largely reflects temporary factors, such as harsh weather and a labor dispute at West Coast ports that hampered exports and delayed deliveries to factories and retailers. Other economic headwinds could linger, however, including a strong dollar that's making U.S. goods more expensive for foreign buyers and a pullback in energy company investment amid a plunge in oil prices. Business investment, for example, fell 3.4 percent after increasing 4.4 percent in the previous quarter as the soaring greenback dented manufacturers' sales. And investment in non-residential structures plunged 23.1 percent in the quarter, in large part a consequence of the oil price slump, as energy companies sharply reduced the number of oil drilling rigs. Exports dropped 7.2 percent as manufacturers lost sales to other countries with more favorable currency exchange rates. Consumer spending, which makes up more than two-thirds of economic activity, also slowed, growing 1.9 percent compared with 4.4 percent in the fourth quarter. Rough weather kept many shoppers at home. And government spending declined 0.8 percent as defense and state and local outlays all fell. It should be noted that the economy shrank at a 2.1 percent annual rate in last year's first quarter, then expanded at 4.6 percent and 5.0 percent annual paces in the next two quarters. "There is plenty of evidence to suggest that the first quarter slowdown represents a temporary blip, and that growth will rebound in the second quarter," says Chris Williamson, chief economist of Markit.
Although rising in 14 of the last 20 months, the Industrial Production Index edged down for the third time in the last four months since climbing to a record high, decreasing 0.7 points in March to 105.2 but was up 2.1 points from a year ago. Additionally, the Index has risen in 52 of the last 69 months since bottoming at 83.5 in June 2009.
New orders for manufactured durable goods jumped for the second time in the last three months, advancing a sharp 4.4 percent in March, after decreasing 1.4 percent the previous month. Also, new orders for manufactured durable goods were up 1.2 percent from a year ago and have advanced year-over-year in 54 of the last 63 months. Excluding the volatile transportation component (aircraft orders), durable goods orders decreased sequentially for the third consecutive month, declining 0.2 percent in March.
The service sector grew (exceeding 50 on the ISM Non-Manufacturing Index) for the 63rd month in a row, with the pace of growth accelerating for the third time in the last four months. In April, the Index rose 1.3 points to register at 57.8 and was 2.6 points above its level of a year ago.
Up in 13 of the last 18 months, the Small Business Optimism Index rose for the second time in the last four months since climbing in December to an eight-plus-year high (highest since October 2006), increasing 1.7 points in April to 96.9, and was also 1.7 points above its level of a year ago. Despite the April increase, the Index hovered just below readings that have normally accompanied an expansion and below its pre-recession average of 100 from 1973 through 2007. NFIB Chief Economist said, “Optimism may have seen a slight jump from last month’s weak numbers, but there was not an especially large gain in any area except for an improvement in profit trends. Small business owners are still wary of the future, and that’s most evident when we asked them about future sales. Overall, the Index remains steady, but it is still a few points below the average and is showing no tendency to break out into a stronger pattern of economic growth. The little economic growth we do see is coming mostly from small businesses. Solid economic growth would require good performance from both big and small firms and that will likely be elusive this year.”