NEW YORK — The second estimate of first-quarter 2015 gross domestic product growth in the United States was revised downward to a 0.7 percent annualized decline from the 0.2 percent increase reported in the advance estimate, RBC Economics reported.
This represented a significant slowing relative to the near-trend 2.2 percent increase seen in the fourth quarter of 2014, which was down from outsized gains of 4.6 percent and 5.0 percent in the second and third quarters of 2014, respectively. Market expectations had been for a slightly larger downward revision to -0.9 percent in the first quarter of 2015, said Josh Nye, an RBC economist.
The downward revision to first-quarter 2015 growth was largely due to weaker net trade and a smaller build in inventories. The contribution to growth from net trade was revised downward to a 1.9 percentage point drag from -1.3 percentage points in the advance estimate. This reflected a stronger increase in imports (5.6 percent) than previously estimated (1.8 percent) as well as a slightly greater decline in exports (-7.6 percent, previously reported as -7.2 percent).
The contribution from inventories was revised downward to a 0.3 percentage point addition from 0.7 percentage points in the advance estimate. Consumption growth was revised downward slightly to a 1.8 percent annualized rate from 1.9 percent in the advance estimate. This represented a fairly significant slowing relative to gains of 3.2 percent and 4.4 percent in the third and fourth quarters of 2014, respectively.
Government spending was also revised downward modestly, falling by 1.1 percent in the second estimate rather than 0.8 percent in the advance release.
Some offset was provided by an upward revision to private fixed-investment growth. Residential investment was revised upward to a 4.9 percent annualized increase (from 1.3 percent in the advance), and non-residential investment was revised upward to a 2.8 percent decline (was -3.4 percent), thereby reflecting stronger growth in equipment and software investment (2.7 percent, was 0.1 percent) and a slightly smaller, albeit still significant, decline in non-residential structures (-20.8 percent was -23.0 percent).
Stronger investment more than offset downward revisions to consumption and government spending, thereby resulting in a modest upward revision to final domestic demand growth (0.8 percent was 0.7 percent).
The key price measure in the report, the core personal consumption expenditure (PCE) deflator, was revised downward to 0.8 percent quarter over quarter (annualized) from 0.9 percent in the advance estimate. The year-over-year change in the core PCE deflator, however, was unrevised at 1.3 percent. The overall PCE deflator was unrevised at -2.0 percent quarter over quarter and 0.3 percent year over year.
“The downward revision to first-quarter 2015 growth was clearly disappointing; however, the details of the revision were not as negative as the headline would indicate,” said Nye. “Net trade was revised downward to be an even greater drag on growth, and while a strong U.S. dollar was likely behind some of this weakness, it can at least partially be attributed to labor disputes at west coast ports, which disrupted trade earlier in the quarter.
“The contribution from inventories was also revised downward, thereby providing less of a headwind for second-quarter 2015 growth,” he explained. “Final domestic demand was revised upward slightly in the first quarter, albeit to a rather weak 0.8 percent increase, which was down from gains of 4.1 percent and 3.3 percent in the third and fourth quarters of 2014, respectively.
“Weak domestic demand was due at least in part to severe winter weather, which hampered activity in the first quarter (similar to the first quarter of 2014 when the economy contracted by 2.1 percent), as well as some effect from the port strike,” said Nye. “We expect the reversal of these transitory factors to boost growth in domestic demand back above a 3 percent pace in the second quarter.
“The policy effect of today’s downward revision was likely limited, with the Fed having largely written off a slowdown in the first quarter, given the effect of a number of transitory factors,” he added. “Much more important is whether a rebound materializes in the second quarter, as it did in 2014 when severe winter weather also played a role in a first-quarter slowdown. Confirmation of a rebound in activity will likely be a necessary condition for raising the fed funds rate in the near term.
“We expect that evidence of a return to above-trend growth will materialize during the summer months, thereby resulting in a fed funds hike at the September 2015 Federal Open Market Committee (FOMC) meeting,” Nye predicted.
Canadian first quarter GDP unexpectedly declines
First-quarter 2015 GDP growth in Canada unexpectedly declined by an annualized 0.6 percent in the quarter following a downwardly revised 2.2 percent gain in the fourth quarter of 2014 (2.4 percent previously). Market expectations had been for a modest although positive 0.3 percent increase in the quarter, said Paul Ferley, assistant chief economist.
Growth in the quarter was expected to be restrained by weakness in investment, with the plummet in oil prices resulting in energy companies cutting back on capital spending, he explained.
“This weakness was confirmed, although the reported drop in business investment at an annualized 15.5 percent was much greater than expected. Declining activity was also evident in the government component, which dropped by 0.8 percent in the quarter,” said Ferley.
“The weakness in these two areas was consistent with our expectation that the income hit from lower oil prices would be largely concentrated in energy company profits and government revenues,” he explained. “Household income was, in our view, less vulnerable unless massive job layoffs occurred and falling gasoline prices boosting real household incomes. Today’s report indicated that real household disposable income soared by a very strong 6.2 percent at an annual rate in the first quarter.
“Disappointingly, consumer’s did not take advantage of this jump in income, with consumer spending rising by a much weaker than expected 0.4 percent at an annual rate,” said Ferley. “Concern about the negative fallout from the drop in oil prices, also with severe winter weather in many parts of the country, may have weighed on consumer confidence despite households enjoying essentially a tax cut in the form of a drop in gasoline prices. Our expectation is that this positive element of the drop in oil prices and a return to normal seasonal temperatures will have more of an upward effect on consumer spending going forward.”
The main offset to the weakness in investment and government spending was an unexpected build in inventories that contributed 0.8 percentage points to the annualized first-quarter 2015 GDP growth rate. Unexpected strength was also evident in residential investment, which rose by an annualized 4.0 percent in the month, with households continuing to take advantage of low interest rates, he explained.
Exports were slightly weaker than expected, dropping by 1.1 percent relative to our assumption of a negligible gain of 0.2 percent and, with indications this morning that U.S. first-quarter 2015 GDP also declined by 0.7 percent, likely offset the benefit of a weaker Canadian dollar.
“With the U.S. economy expected to rebound in the second quarter, as the transitory effect of adverse weather and a west coast port strike reverse, we expect Canadian export growth to rebound,” said Ferley. “With imports declining by a slightly greater 1.5 percent, net exports managed to contribute 0.2 percentage points to the first-quarter 2015 GDP growth rate.”
Also released this morning was the March GDP report, which was similarly weaker than expected by dropping 0.2 percent following a downwardly revised 0.1 percent drop in February (0.0 percent previously). Market expectations had been for a much stronger 0.2 percent increase, according to Ferley.
“Much of this expected strength resulted from earlier-released data indicating a strong rebound in manufacturing, although today’s numbers indicated only a negligible 0.1 percent gain,” he added. “Weakness in the energy sector contributed to larger than expected declines in mining (2.6 percent) and construction (0.8 percent). Our expectation is that assuming greater strength in exports, manufacturing should start to add to growth in subsequent months.
“The stall in first-quarter 2015 growth was disappointing, with the downward hit from falling oil prices, adverse winter weather, and declining U.S. growth taking a greater toll on the economy than had been expected,” said Ferley. “The extent to which the weakening in activity was weather related in both Canada and the U.S, it has likely delayed rather than eliminated spending by households and businesses.
“The drag from the energy sector will likely continue, we expect the intensity to ease later in 2015,” he added. “Thus, our forecast continues to assume that the pace of GDP growth will bounce higher in the second quarter, although the monthly GDP detail suggests a rate closer to 2.0 percent rather than the 2.8 percent assumed in our current forecast.
“In terms of policy implications, the Bank of Canada’s most recent forecast, contained within the April 2015 Monetary Policy Report, reflected the expectation of no growth in the economy in the first quarter,” said Ferley. “Thus, today’s report implied greater than expected economic weakness; however, recent comments by the central bank reflected the view that much of the weakness in the first quarter will prove to be temporary with growth eventually returning to an above-potential rate by the second half of 2015.
“The Bank of Canada will remain on the sidelines awaiting confirmation of this, with sustained above-potential growth warranting an eventual return to tightening mode,” he predicted. “The unexpected weakness in today’s report, however, further supports our contention that any hike in the overnight rate is unlikely until 2016.”
SOURCE: RBC Economics press release