Is it possible to have an economic optical
illusion?
On Friday, the Commerce Department reported
the U.S. economy contracted at an annualized rate of 0.7 percent during the
first quarter of 2015. The Federal Reserve sees things slightly differently.
Previously, the Commerce Department had
reported our gross domestic product (GDP), which is the value of all goods and
services produced in the United States, had increased at an annualized rate of
0.2 percent during the first quarter. The estimate was weaker than economists
had expected and caused some analysts to wonder whether the economic recovery
was stalling.
Weak first quarter GDP has caused other
analysts, including those at the Federal Reserve Bank of San Francisco who
penned an article entitled, The Puzzle of
Weak First-Quarter GDP Growth, to wonder whether a statistical anomaly is
causing first quarter GDP growth to appear weaker than it really is. Barron’s explained it like this:
“Since the expansion began in mid-2009, there
have been six calendar quarters that have included the January-March quarter;
for those six quarters, the average rate of growth has been just 0.4 percent. For
the other 17 calendar quarters, growth has averaged 2.8 percent. One reason for
this pattern seems to be faulty seasonal adjustment in the first quarter… In
any case, if the same pattern persists in 2015, expect a rebound in the current
quarter and through the second half of this year. And, based on data released
so far, one source of the rebound would be a pickup in housing.”
The San Fran Fed report concluded, “There is
a good chance that underlying economic growth so far this year was
substantially stronger than reported.”
While GDP was revised downward last week, the
core consumer price index (CPI), which is a measure of inflation that excludes
food and energy, showed inflation increasing for the first four months of the
year. If it continues apace, by year-end the CPI will rise above the 2 percent
inflation target set by the Fed and will probably set the stage for an increase
in the Fed funds rate.
Investors weren’t thrilled with last week’s
news, and markets generally moved lower.
IF America’s Growth is
slowing, the United
States was The Little Engine That Could during
2014. We added three million jobs, unemployment fell to 5.6 percent, and GDP grew
by 2.4 percent for the year. Unfortunately, despite the contentions of the San
Francisco Federal Reserve’s report, we appear to be losing momentum.
So, what happened?
The Economist reported a variety of factors have
contributed to the slowdown. The U.S. dollar has gained 20 percent in value
against the euro during the past year, which made exports more expensive. In
fact, exports were down about 3 percent, year-over-year, in March. Also, oil
prices fell, which knocked 0.8 percentage points off economic growth as
investment in mining structures shrank. Finally, American consumers didn’t
spend as much as experts anticipated they would, despite lower oil prices.
Lower-than-expected spending may reflect weak wage growth.
While growth in the United States shows signs of slowing, the
Eurozone’s growth is accelerating. The region emerged from a double-dip
recession in the spring of 2013, according to The Economist. Many large country’s economies, including those of Spain
and France, delivered relatively strong GDP growth during the first quarter of
2015. As a whole, the Eurozone grew by 0.4 percent during the quarter,
outperforming the United States.
Why is the Eurozone doing so well?
The European Central Bank took a page from the Federal Reserve’s
playbook and began a round of quantitative easing (QE). QE has contributed to
the euro losing value against the U.S. dollar, which has helped Eurozone
exports. Also, consumers in the Eurozone have been spending the windfall
created by lower oil prices.
Will the United States and the Eurozone be able to sustain
positive economic growth? Only time will tell.
Weekly Focus – Think About It
“There is nothing noble in being superior to
your fellow men. True nobility lies in being superior to your former self.
--Ernest Hemingway,
American author
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