An Economic Optical Illusion?


Written by: Jon McGraw

On Friday, the Commerce Department reported that the U.S. economy contracted at an annualized rate of 0.7 percent during the first quarter of 2015. The Federal Reserve sees things slightly differently.

The Markets

Previously, the Commerce Department had reported our gross domestic product (GDP), which is the value of all goods and services produced in the U.S., had increased at an annualized rate of 0.2 percent during the first quarter. The estimate was weaker than economists had expected and caused some analysts to wonder whether the economic recovery was stalling.

Weak first quarter GDP has caused other analysts, including those at the Federal Reserve Bank of San Francisco who penned an article entitled The Puzzle of Weak First-Quarter GDP Growth to wonder whether a statistical anomaly is causing first quarter GDP growth to appear weaker than it really is. Barron’s explained it like this:

“Since the expansion began in mid-2009, there have been six calendar quarters that have included the January–March quarter; for those six quarters, the average rate of growth has been just 0.4 percent. For the other 17 calendar quarters, growth has averaged 2.8 percent. One reason for this pattern seems to be faulty seasonal adjustment in the first quarter … In any case, if the same pattern persists in 2015, expect a rebound in the current quarter and through the second half of this year. And, based on data released so far, one source of the rebound would be a pickup in housing.”

The San Fran Fed report concluded, “There is a good chance that underlying economic growth so far this year was substantially stronger than reported.”

While GDP was revised downward last week, the core consumer price index (CPI), which is a measure of inflation that excludes food and energy, showed inflation increasing for the first four months of the year. If it continues apace, by year-end the CPI will rise above the 2 percent inflation target set by the Fed and will probably set the stage for an increase in the Fed funds rate.

Investors weren’t thrilled with last week’s news, and markets generally moved lower.

Data as of 5/29/15 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) -0.9% 2.4% 9.8% 16.5% 14.5% 5.9%
Dow Jones Global ex-U.S. -2.0 6.4 -2.3 9.7 6.0 3.7
10-year Treasury Note (Yield Only) 2.1 NA 2.5 1.7 3.3 4.0
Gold (per ounce) -1.1 -0.7 -5.1 -9.0 -0.6 11.1
Bloomberg Commodity Index -1.5 -3.2 -25.1 -8.4 -4.0 -3.9
DJ Equity All REIT Total Return Index -1.1 -1.7 9.9 11.9 14.3 8.0

Is the U.S. Losing Momentum While Europe Is Gaining It?

If America’s growth is slowing, the U.S. was The Little Engine That Could during 2014. We added 3 million jobs, unemployment fell to 5.6 percent, and GDP grew by 2.4 percent for the year. Unfortunately, despite the contentions of the San Francisco Federal Reserve’s report, we appear to be losing momentum.

So, what happened?

The Economist reported a variety of factors have contributed to the slowdown. The U.S. dollar has gained 20 percent in value against the euro during the past year, which made exports more expensive. In fact, exports were down about 3 percent, year over year, in March. Also, oil prices fell, which knocked 0.8 percentage points off economic growth as investment in mining structures shrank. Finally, American consumers didn’t spend as much as experts anticipated they would, despite lower oil prices. Lower-than-expected spending may reflect weak wage growth.

While growth in the U.S shows signs of slowing, the eurozone’s growth is accelerating. The region emerged from a double-dip recession in the spring of 2013, according to The Economist. Many large countries’ economies, including those of Spain and France, delivered relatively strong GDP growth during the first quarter of 2015. As a whole, the eurozone grew by 0.4 percent during the quarter, outperforming the U.S.

Why is the eurozone doing so well?

The European Central Bank took a page from the Federal Reserve’s playbook and began a round of quantitative easing (QE). QE has contributed to the euro losing value against the U.S. dollar, which has helped eurozone exports. Also, consumers in the eurozone have been spending the windfall created by lower oil prices.

Will the U.S. and the eurozone be able to sustain positive economic growth? Only time will tell.

Weekly Fun—Think About It

“There is nothing noble in being superior to your fellow men. True nobility lies in being superior to your former self.”

—Ernest Hemingway, American author