Weak First-Quarter GDP No Reason to Panic

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. U.S. GDP grew only 0.2% in the first quarter, much lower than expectations. I'm here with Bob Johnson--he is our director of economic analysis--to take a closer look at this number and also to see what it could mean for growth for the rest of the year.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, this 0.2% increase was below expectations that were already pretty low, given some of the weather problems in the quarter. What's your take on this number? Is it a sign that the U.S. is headed toward a recession or a major slowdown?

Johnson: Absolutely not. You can't just take one quarter out of context. This is not the beginning of the end, so to speak. I think this is a very seasonal issue. I think, as you mentioned, weather was an issue; there was an issue with the ports--that was also in the number. And then you had the energy situation. All of that was holding back and weighing down on the GDP calculation; many of those items hopefully will reverse themselves in the future.

Unfortunately, the energy situation and some of the import/export stuff may not easily reverse itself, which will hold things back a little bit going forward. So, we won't have as big of a bounce as last year.

Glaser: This is a number that's sequential and then annualized. Is that really the best way to look at GDP? Or do you think that there is a better way to maybe put it in context?

Johnson: Well, it's one way, and I think you have to look at it several different ways. One way is to compare the quarter with the same quarter a year ago--that gets out some of the seasonal variables in the numbers. That sometimes helps make the numbers make a little more sense, and we're up 3%, year over year, on that metric. That's really good. That's one of the best [year-over-year quarterly improvements] of this recovery. But remember that last year was even worse than this year in terms of weather, so it's a little bit of a help. Maybe the underlying number is a little bit less than 3%, but it's certainly something in that range.

And then another, even better way [of looking at the GDP number] is to roll four quarters together. It's easy to have one quarter impacted by weather, but when you roll a whole year's worth [of numbers together], it becomes a little bit harder to mess up the numbers. And even that number is up more than 3%, year over year, when you roll the four quarters together and then compare it with the previous four quarters. That's a pretty good growth rate. So, there certainly doesn't seem to be any reason to panic here.

<TRANSCRIPT>

Glaser: Let's take a deeper look at the numbers. You're always talking about how the consumer is so important. What did consumption look like in the first quarter?

Johnson: Consumption is about 70% of the calculation. If you know what's going on in consumption, you've got a pretty good feel for what's happening with the rest of the report. And consumption ran just under 2% in the quarter; it had been running more like 4%. It was a bad quarter for autos in particular. And in general, consumers were a little bit more cautious than many people had anticipated they would be. We got the benefits of lower oil prices, but on the other hand, we lost a lot of oil workers. Things happened in various real estate markets that probably slowed things up a little bit. So, that certainly hurt consumption. And that was the biggest reason why, even going into the quarter, we were so scared about what the number might be. We were concerned that the consumption number would be bad. The good news is that that number is likely to get better with better weather.

Glaser: Now, looking at the import/export numbers, there are a lot of things happening there with the stronger dollar, with some of the port issues. What impact did that have on the calculation?

Johnson: The overall contribution--it took 1.3% off of the calculation. So, we would have been up more like 1.5% or something like that; it's still not exactly a wonderful number. If you exclude the exports and imports from the situation, the government made a particularly large assumption on imports, which hopefully gets partly revised when we see the real numbers for the March imports. But clearly that weighed on the calculation. We had thought that the number would be bad; we thought it'd take 1% off of the GDP calculation, but they added an extra dose of cost into their numbers, and it was down 1.3%. So, that's a pretty negative contribution.

Glaser: How about business investments?

Johnson: Business investment overall didn't have a huge impact, but there was one category that's really worth focusing on, and that's the business structures. And it's not the buildings that you'd think of, although that wasn't a great quarter either--we were down in that category. But a big deal was that oil wells count as a structure, and so business structures were down 23%. Now, that's on an annualized basis, which mean they were down 5% or 6% and then we multiply it by four; but still that's a big number to be down in that structures category, and that probably overall took 0.8% off the GDP calculation. We'll probably have some continuation of that slowing, but at some point--this year even--I think that should stop.

Glaser: How about inventories? Did that have a big impact?

Johnson: The inventories had a big positive impact. You can't really call it positive news, but it was one of the big positive contributors that we weren't expecting. It added 0.7% to the GDP calculation. Without inventories, we would have had a down GDP report. That was kind of unusual to have inventories make that big of a contribution.

Last year's first-quarter inventories actually took away from that calculation, and then we had a big bounce in the second quarter. Unfortunately, this year, it's going be the reverse. Inventories were a big help in the first, and they'll probably hurt us in the second and take away some of the benefit. But clearly, with inventories helping that much, it kind of makes for a lower-quality report, if you will.

Glaser: Then finally, what was government's contribution?

Johnson: This time, government did next to nothing, for all practical purposes. I think it took away 0.2%, which is better than it's been. But certainly, we're not adding government employees, and those employees are the biggest factor in calculating the government contribution. It's not getting better right now, and it's been one of the things really holding back the economy.

Glaser: You mentioned that consumption could potentially bounce back as the weather gets better. When you look at your forecast for next quarter, should we expect the kind of big bounce that we had in the second quarter of 2014?

Johnson: Well, recall that last year we went from a negative 2% or so to a positive 4% or so in one fell swoop. This year, we're going to start from a higher base of 0.2%. I think we'll have a bounce to, say, 3% or 3.5%, which will still be a nice bounce. I'll take it. But I do think that the big inventory swing this time around is going to be negative instead of positive. So, that's going to mean the number won't look as good as it looked last time around. Certainly, I don't think we're finished with the slowing in the energy sector just yet. But consumption, on the other hand, will look a little bit better, and housing should certainly look a little better, too, I hope.

Glaser: So, on that housing front, are there signs that housing is actually starting to improve?

Johnson: Well, in this quarter, housing net added very little. It grew about 1%, which means it added nothing mathematically to the number. You take a small percentage of GDP and multiply it by only a small gain and it amounted to nothing, for all practical purposes. Recall existing-home sales were down; maybe we were a little better on the actual building of houses--not a lot. I didn't have a chance to check the remodeling numbers, but those three components rolled up to no change.

I think, as we look ahead, those numbers are likely to get better, and we had some great signs of that today. Last week's column had "Up, Up, and Away for Housing" [in the title] with a question mark. But certainly, pending home sales had a really nice report today; not only was today's number up over 1% sequentially, which is nice, but they significantly revised up the February number so that it had one of its biggest gains in history during the month of February.

So, those pending home sales tend to predict existing homes two or three months out, and that tends to predict furniture sales and a lot of retail sales two or three months after that, as people move into those homes. So, that was a really, really great piece of news that we got on Wednesday.

Glaser: So, for the full year, do you think the U.S. economy can still grow in that 2% or 2.5% range?

Johnson: Absolutely. I think some people are thinking it could grow a little bit faster than that. I'm thinking the bounceback may not be as strong as some people think. But I certainly think 2.5% is very doable; 3% might be a little bit tough.

Glaser: So, finally, does a report like this really change the Fed's calculus when they're thinking about potentially raising rates sometime this year? Does this put that even potentially further on the back burner?

Johnson: I think not. I think they'll be watching some of the labor reports and some of the other things going forward more than this. Certainly, they've got a lot more economists working on the problem than I do. And certainly, they can look at the numbers in alternate ways besides this seasonally adjusted, quarter-over-quarter, multiply-it-by-four routine. They can look at the same numbers and say, "Gee, that looks like 3% growth to me if I look at it year over year." And so, I don't think this report will be convincing. I think if we had a really terrible April employment report, that would clearly slow things up; but I still don't think they are in any great rush. This report certainly wasn't wonderful, so I think that may keep them at least until September, which seems to be the consensus right now.

Glaser: Bob, thanks for your take today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.