US weakness is likely to be temporary

Data released late last week showed that the US economy expanded at a very weak annualised rate of 0.5% in quarter one this year, following the sluggish growth of 1.4% recorded in the final quarter of 2015. 

Thus, we have had two consecutive quarters of weak growth in the US. 

This raises the question about whether the expansion in the US economy, which is now one of the longest on record, may be coming to an end.

The slowdown in US growth reflects a number of factors, including a collapse in investment in the oil sector, a rise in personal saving and slower inventory accumulation, as well as the strong dollar and sluggish global economy, which are depressing exports. 

Seasonal factors, partly related to the early timing of Easter, may also have impacted the quarter one figures.

The breakdown of the first quarter data show that while personal consumption remained the main driver of growth, it was held back by a significant decline in car sales. 

However, net exports deducted nearly 0.4 percentage points from GDP, maintaining their recent negative trend. 

Meantime, business investment was very weak, recording its largest drag on growth in nearly seven years.

The GDP figures are generally reflective of other macro data published in the opening months of the year. 

For example, retail sales declined by 0.1% in quarter one, following just a small rise in the previous quarter. 

Industrial output contracted for a second consecutive quarter. 

Key housing market indicators, including new starts and existing home sales, showed little change in the quarter. 

However, although the overall economy has slowed, the labour market continues to perform strongly. 

The key non-farm payrolls jobs number averaged monthly growth of 209,000 in the first quarter, representing the highest quarterly average rise in 10 years.

Meantime, the unemployment rate edged back up to 5% in March, from February’s eight-year low of 4.9%.

However, this largely reflects a continued recovery in the labour force participation rate from the near 40-year low reached in September last year.

Despite these developments, year-on-year growth in earnings remains subdued at 2.3%. 

Price pressures are beginning to pick up, though, with the headline CPI rate rising to 1% in the opening quarter of this year.

More notably, the core CPI inflation rate, which excludes energy, has jumped to near a four-year high at 2.2%. 

The expectation is that the economy should soon regain momentum as the recent slowdown is partly due to temporary factors.

The hit to investment in the energy sector from the collapse in oil prices should have largely run its course at this stage, especially with oil prices now on the rise again.

Furthermore, continuing strong job growth and moderate wage increases should fuel good growth in consumer spending. Low energy prices are also providing some support to spending, while interest rates remain very low.

However, the economy still faces some headwinds, such as the slowdown in the global economy, financial market volatility, the impact from the stronger dollar and uncertainty over November’s elections.

Overall, the Fed expects that the US economy will grow by around 2% in 2016 and 2017.

The slowdown in the US economy and downside risks for the global economy have seen the Fed turn more cautious this year about hiking rates.

The timing of the next rate hike will depend on incoming US data, as well as developments in the global economy.

Growth would need to strengthen appreciably to bring rate hikes back onto the agenda.

However, if as expected, the economy does rebound again in the coming months, then the US Fed seems likely to raise rates in the second half of the year.


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