OLIVER MANGAN: Slow growth won’t derail US Fed from further rate rises

US GDP growth slowed to just 0.2% in the first quarter of the year from 0.5% in the final three months of 2016, its weakest performance since the opening quarter of 2014.

These data are adjusted to take account of seasonal factors such as holidays.

However, there appears to be an issue with the seasonal adjustment of the figures, which has given an overly negative view of growth in the first quarter for the last number of years.

Temporary factors such as unseasonably warm weather in the US at the start of the year, the later timing of Easter, and delayed tax refunds did have negative impacts on GDP in the opening quarter of this year, but not to the extent indicated by the GDP data.

The detailed GDP figures suggest that a marked weakening in consumption was the primary cause of the slowdown in growth in quarter one.

Consumer spending virtually stalled in the quarter, after having grown by 2.7% in 2016.

A sharp decline in motor vehicle sales as well as weak spending on services — including on utilities, which was impacted by unseasonably mild weather — were important drags on household spending.

Net exports were broadly flat in the first quarter, while slower inventory accumulation also weighed on growth.

Encouragingly, an improvement in business investment gave a boost to GDP. A key reason for this was a rebound in investment in oil extraction from its very depressed levels in the past couple of years.

Suspicions about the extent of the slowdown in growth in the first quarter have been further aroused by the fact that the labour market continued to firm.

Non-farm payrolls grew by an average of 178,000 per month in the quarter, up from the average monthly increase of 148,000 seen in the final quarter of 2016.

Meanwhile, the unemployment rate fell to 4.5% in March, its lowest level in 10 years.

In the meantime, measures of consumer confidence rose to exceptionally high levels in the opening months of the year, while most business sentiment and activity surveys were quite strong.

The housing market continued to firm, while US stock markets hit record highs, helped by positive company earnings reports, hardly signs of a slowing economy.

It is not that surprising, then, that the US Federal Reserve downplayed the weakness of the first quarter GDP data at its policy meeting last week.

It indicated that it views the slowing in growth during the first quarter “as likely to be transitory”.

It noted that while consumer spending increased only modestly, the fundamentals underpinning the continued growth of consumption “remained solid”.

The Fed has previously indicated that it is likely to hike rates on two further occasions this year. It is very much keeping its options open regarding the timing of its next rate hike.

The fact that it downplayed the slowdown in GDP growth in quarter one and focused, instead, on the solid fundamentals underpinning the economy means that a rate hike at its next meeting in June remains a strong possibility.

The robust US employment data for April, published on Friday, with payrolls rising by 211,000 and a further fall in the jobless rate to just 4.4%, have strengthened the case for a June rate hike.

It is also important to bear in mind that policy tightening from the Fed could also arise if the Central Bank starts to gradually reduce the size of its balance sheet, as it begins to reverse its large QE asset purchase programme.

The Fed could start to do this before the end of the year.

Thus, we could see another rate hike in September, with the unwinding of QE beginning in December, if as seems likely, growth does indeed recover from its dip in quarter one.

Oliver Mangan is chief economist at AIB


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