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U.S. Economy Better Than Thought, but Still Weak U.S. Economy Better Than Thought, but Still Weak
(about 4 hours later)
The economy grew at an annual rate of 0.8 percent in the first quarter of 2016, a slightly more robust pace than initially thought but still weaker than what many experts — not to mention ordinary workers — would like to see as the recovery enters its eighth year. The American economy is picking up speed after a slow start to the year, with resilient consumer spending and a buoyant housing market just about making up for a falloff in investment by cautious companies.
The new estimate on Friday, from the Commerce Department, echoes other hints lately that growth should continue to improve, with a healthy real estate sector and resilient consumers leading the way. But the overall gains are still likely to fall short of what many experts — not to mention ordinary workers — would hope to see as the recovery nears the end of its seventh year.
However, other areas of the economy, especially manufacturing and the oil patch, are still struggling, highlighting the crosscurrents confronting policy makers and politicians. These crosscurrents highlight the challenge facing policy makers at the Federal Reserve as they weigh whether to raise interest rates when they meet in mid-June, or wait until July or later in the year.
The government’s initial estimate of first-quarter economic activity, released in late April, showed an annual growth rate of 0.5 percent, but updated data for personal consumption and housing investment prompted Friday’s upward revision. On Friday, the Commerce Department raised its estimate of the pace of growth in the first quarter of 2016 to 0.8 percent, a move driven mostly by better data on inventories and housing. Other areas of the economy, especially manufacturing and mining, still face significant headwinds.
One explanation for the hesitancy of businesses to spend is pressure on earnings after several years of expanding margins. The Commerce Department said corporate profits rose just 0.3 percent in the first quarter, after a 7.8 percent drop in the fourth quarter of 2015.
“It just confirms that we had a soft start to the year but not quite as bad as we thought,” Ethan Harris, head of global economics at Bank of America Merrill Lynch, said on Friday. “Business investment was very weak, but the one bit of positive news was a surge in home construction. We’re still in the recovery stage in the real estate market, especially for multifamily buildings.”“It just confirms that we had a soft start to the year but not quite as bad as we thought,” Ethan Harris, head of global economics at Bank of America Merrill Lynch, said on Friday. “Business investment was very weak, but the one bit of positive news was a surge in home construction. We’re still in the recovery stage in the real estate market, especially for multifamily buildings.”
The third and final estimate for growth will be released on June 28. The government’s initial estimate of first-quarter economic activity, released in late April, showed an annual growth rate of 0.5 percent. The third and final estimate for growth will be released on June 28.
For the second quarter, which covers April, May and June, most experts forecast that the annual growth rate will rebound to about 2.5 percent. For the second quarter, which covers April, May and June, most experts forecast that the pace will pick up to about 2.5 percent.
The report on Friday suggests that 2016’s economic trajectory will follow an arc that has confounded experts for years: a soft first quarter followed by a sudden turnaround even though underlying conditions remain mostly the same throughout. Underscoring the consumer’s ability to shrug off the anxiety that has gripped some businesses, the University of Michigan said on Friday that its monthly survey of consumer confidence in May showed sentiment at its healthiest level since June 2015. Expectations for future growth improved among both high- and middle-income households, according to the University of Michigan researchers.
“There is better momentum now, but it’s still a bit of a head fake,” said Diane Swonk, an independent economist based in Chicago, in an interview before the release of the data. The reports on Friday also suggest that 2016’s economic trajectory will follow an arc that has bedeviled forecasters for years: a soft first quarter followed by a turnaround in the spring even though underlying conditions remain largely the same throughout the period.
In 11 of the last 15 years, a listless January, February and March period was followed by a sudden snapback in economic expansion in the next quarter, a trend that Ms. Swonk said could not be explained by “polar vortexes and other one-off factors.” “There is better momentum now, but it’s still a bit of a head fake,” said Diane Swonk, an independent economist based in Chicago.
The pattern is probably because of some seasonal kinks in the data that government analysts have not been able to determine, but Ms. Swonk said the repeated rebounds can “create a false sense of security,” obscuring the continuing paucity of real economic gains for many Americans over time. In 11 of the last 15 years, a listless January, February and March were followed by a snapback in economic expansion in the next quarter, a trend Ms. Swonk said could not be explained by “polar vortexes and other one-off factors.”
“It could be everything from a change in the structure of the economy to mismeasurement,” Ms. Swonk said. Government agencies are working to improve their methods, she said, but budgets are tight in Washington and it has been difficult for federal statisticians to keep up with the broader shift from manufacturing to services as a growth engine in recent decades.
The seasonal kinks in the data can “create a false sense of security,” she said, obscuring the continuing paucity of real economic gains for many Americans over time. “It was still a tepid quarter even if it was less bad. That doesn’t equal good growth.”
Although revisions and statistical quirks are nothing new for economists, Ms. Swonk explained that they appear much larger these days because the overall level of economic growth is low to begin with. “You notice it much more when you’re skating so close to thin ice,” she said.Although revisions and statistical quirks are nothing new for economists, Ms. Swonk explained that they appear much larger these days because the overall level of economic growth is low to begin with. “You notice it much more when you’re skating so close to thin ice,” she said.
Just how thin that ice really is has prompted considerable debate within the Federal Reserve and on Wall Street as Fed officials ponder a possible interest rate increase when they next meet in mid-June. Just how thin that ice really is has prompted considerable debate within the Federal Reserve and on Wall Street as Fed officials ponder a possible interest-rate increase when they meet in mid-June.
Until recently, most outside experts did not think the Fed would act on monetary policy until September at the earliest. But the official account of the central bank’s last meeting in April, released May 18, showed policy makers were ready to tighten monetary policy in June if they felt the economy was indeed getting stronger. Until recently, most outside experts did not expect the Fed to lift its short-term rate lever until September at the earliest. But the official account of the central bank’s last meeting in April, released May 18, showed that policy makers were ready to tighten monetary policy in June if they thought the economy was indeed getting stronger.
Ian Shepherdson, the chief economist at Pantheon Macroeconomics, said positive recent indicators like retail sales and buoyant home prices in April strengthened the hand of Fed hawks, although they could wait as markets remained anxious before Britain’s June 23 referendum on whether to exit the European Union.Ian Shepherdson, the chief economist at Pantheon Macroeconomics, said positive recent indicators like retail sales and buoyant home prices in April strengthened the hand of Fed hawks, although they could wait as markets remained anxious before Britain’s June 23 referendum on whether to exit the European Union.
With the so-called Brexit vote looming, one alternate possibility would be for the Fed to hold off in June but telegraph a move at its July gathering, Mr. Shepherdson said. With the so-called Brexit vote looming, one alternate possibility would be for the Fed to hold off in June but telegraph that it plans to move at its July gathering, Mr. Shepherdson said.
Next week should provide greater clarity about the central bank’s course and the economy’s real momentum. On Tuesday, the Commerce Department will report on consumer income and spending in April, and Friday will bring the Labor Department report on May unemployment and hiring, an important metric for the Fed. Next week should provide greater clarity about the economy’s real momentum. On Tuesday, the Commerce Department will report on consumer income and spending in April, and Friday will bring the Labor Department report on May unemployment and hiring, a crucial metric for the Fed.
“We’re sticking to our September base case,” Mr. Shepherdson said in a note to clients on Thursday, “but we fully accept that June and July are also very real possibilities.” Buried in the details of the G.D.P. report on Friday were signs that inflation was picking up to more normal levels after years of dormancy, Mr. Harris said. In particular, he said, the so-called core measure of consumer prices rose at an annual rate of 2.1 percent in the first quarter, just above the Fed’s 2 percent target.
Buried in the details of the G.D.P. report were signs that inflation was picking up to more normal levels after years of dormancy, Mr. Harris said. In particular, he said, the so-called core measure of consumer prices rose at an annual rate of 2.1 percent in the first quarter, just above the Fed’s 2 percent target.
“This nudges the Fed closer to a rate hike, although June is still very much up in the air,” Mr. Harris said. “They want to see clear evidence that the second quarter is stronger than the first quarter.”“This nudges the Fed closer to a rate hike, although June is still very much up in the air,” Mr. Harris said. “They want to see clear evidence that the second quarter is stronger than the first quarter.”
Mr. Shepherdson also called the decision a close call in a note to clients on Thursday “We’re sticking to our September base case,” he said, “but we fully accept that June and July are also very real possibilities.”