Last week’s surprising report that the value of all the goods and services produced in America did not grow in the first quarter, which will be subject to two revisions as firmer data come in, tells us one of two things. Either the American economy has stopped growing, or the GDP figures, which have reported zero or nil first-quarter growth for the past thirty years, reflect flawed seasonal adjustments. Michael Gapen, chief U.S. economist at Barclay’s, suspects the latter. And The Economist only half-wryly comments, “If only America could abolish the first quarter, its economy would look so much better.” So last week’s GDP report is not very helpful, taken alone. Nor is the reaction of the Federal Reserve Board’s monetary policy committee. Chairwoman Janet Yellen recognised the weakness but put part of the blame on the “transitory effects” of “transitory factors”. Which is why we have to troll through a variety of other data to separate those transitory factors from the underlying trends in order to decide whether, like the British, we are experiencing a pause before resumption of growth, or an exhausted recovery.
There are reasons for pessimism. First, the news from the rest of the world is worrying.
· China is reporting that double-digit growth is a thing of the past, replaced by what the leadership claims is a 7% annual growth, which many experts believe is a considerable overstatement, and a property bust seems to be in the offing.
· Euroland remains in thrall to unreformed labour markets in several countries, a banking system yet to get a US-style restructuring, and growth running well below 2%.
· The Russian economy is hard hit by low oil prices and sanctions resulting from Vladimir Putin’s efforts to reverse the WWII territorial settlement.
· Brazil’s economy is contracting, business confidence is plumbing record levels, and inflation is soaring.
· Growth in both Canada and Mexico, America’s NAFTA partners, is likely to slow substantially as lower oil prices “drag on national performance” predict economists at Scotiabank.
This weakness in the economies of our trading partners explains a good part of the decline in first-quarter exports, a decline exaggerated by a “transitory factor” -- strikes at key West Coast ports that caused exports to stack up on docks and in warehouses. Result: 1.3 percentage points lopped off first-quarter growth by declining exports.
Then there is the news from corporate America. Its coffers remain stuffed with cash, but its purses remain zipped. Business spending on equipment and software fell in March for the seventh consecutive month. Business fixed investment (on machinery, buildings, and the like) contracted at an annualised rate of 23 percent in the first quarter, in part due to pull-backs by oil drillers, beset by low prices and an administration unwilling to allow them to export their surplus oil. “Businesses continue to show that they are unwilling to get aggressive about expanding their businesses in the current environment,” comments Stephen Stanley, economist at Amherst Pierpont Securities.
A final worry comes from a surprising drop in consumer confidence, which had rebounded in March. In April, according to the Conference Board, its index gave back all of those gains and then some. Consumers turned gloomier about both their present economic circumstances and the outlook. “There is little to suggest that economic momentum will pick up in the months ahead,” concludes Lynn Franco, Director of Economic Indicators at the Conference Board.
Perhaps, but only perhaps. For one thing, other measures of consumer confidence are pointing up, not down. For another, the housing market remains strong. Unconfident consumers don’t buy houses, bidding up prices in the process. Yet that is exactly what is happening. Contract signings for purchases of previously owned homes, about 90 percent of all home sales, rose in March and were 11.1 percent up on last year’s figure, while prices are up by about 5 percent. Economists at Goldman Sachs expect the good news to continue, “Robust growth in personal disposable income … should … contribute to rising demand for housing” concludes a recent client advisory.