Economy barely grows in first quarter, could cause Fed to delay rate hike

Economy barely grows in first quarter, could cause Fed to delay rate hike
A worker prepares a chassis to receive an engine on a 2015 aluminum-alloy body Ford F-150 truck at the company's Kansas City Assembly Plant in Claycomo, Mo., on March 13. (Charlie Riedel / Associated Press)

The economy barely grew in the first quarter as bad winter weather, the West Coast port dispute, falling oil prices and a rising dollar took a heavy toll.

The weaker-than-expected report Wednesday confirmed recent data indicating a slowdown in growth and could lead Federal Reserve officials to delay a long-awaited interest rate hike.

They could signal that in a statement due out at 11 a.m. PDT Wednesday after central bank policymakers conclude a two-day meeting.

Total economic output, also known as gross domestic product, expanded at a 0.2% annual rate from January through March, down sharply from a 2.2% pace in the fourth quarter, the Commerce Department said.


Economists had expected growth to slow, but not as much. They had forecast a 1% annual rate.

But the economy struggled in several key areas as it generated the weakest three-month period since the first quarter of last year.

“It is looking, unfortunately, like 2015 is going to be another year where we don’t have the momentum needed to escape the sluggish pace of GDP growth we’ve experienced since the recession,” said Sam Bullard, senior economist at Wells Fargo Securities.

Growth in consumer spending, which is a major driver of economic growth, suffered a steep falloff. It rose by 1.9% in the first quarter compared with a 4.4% increase in the fourth quarter.

Although gas prices were lower than the same period last year, the economic benefits for consumers "have been slow to materialize," said Scott Hoyt, senior director of consumer economics at Moody's Analytics.

It is "normal for consumers to be slow to spend savings from lower gasoline prices, but historically they do, which will lift growth," he said.

Business investment fell 3.4% in the first quarter, with much of that probably caused by reduced spending on oil rigs and other structures by energy companies because of the large drop in oil prices, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

The rising value of the dollar compared to other currencies made U.S. goods and services more expensive abroad, triggering a 7.2% decline in exports. Exports had increased 4.5% in the fourth quarter.

State and local government spending fell 1.5% compared to a 1.6% increase in the fourth quarter.

“Economic growth in the first quarter was restrained by factors including tepid foreign demand and harsh winter weather,” said Jason Furman, chairman of the White House Council of Economic Advisors. “At the same time, households saved most of their gains from low energy prices.”

Even more severe snow and cold caused the economy to contract at a 2.1% annual rate in the first quarter of 2014. Pent-up demand, however, helped growth bounce back strongly to a 4.8% annual rate over the next six months, the fastest pace since 2003.

But economists don't expect such a sharp rebound in the second quarter of this year.

Bullard had estimated the economy would grow at a 2.7% annual rate in the second quarter. But he said that forecast probably will be revised down given some of Wednesday's data, such as an unexpectedly larger increase in inventories that will reduce growth this spring.

"That rebound is not looking to be as vigorous as what was initially projected," Bullard said.

Thursday's report provided another dose of disappointing economic data for Fed policymakers as they wrap up their two-day meeting.

They are trying to decide when to pull the trigger on the first increase in the central bank's benchmark short-term interest rate since 2006.

Fed officials are not expected to announce a rate increase when they issue their policy statement Wednesday, but they could provide clues about whether they are inclined to wait longer to make the move because of recent weakness in the economy.

The so-called federal funds rate has been near zero percent since late 2008 in an attempt to boost economic growth by lowering borrowing costs and making it more enticing to spend than save.

As the recovery from the Great Recession strengthened and job growth accelerated last year, Fed officials signaled they could start raising the rate as early as June.

But job creation slowed sharply in March, consumers cut back their spending during the winter and inflation continued to run below the Fed's annual target.

The weak first-quarter economic growth could lead Fed policymakers to wait until September or later to hike the interest rate, which is used as a benchmark by banks to set rates for credit cards, auto loans, home equity lines of credit and other lending.

Last week, William C. Dudley, the president of the Federal Reserve Bank of New York, said he hoped the central bank would raise the interest rate this year.

The slowdown in growth in the first quarter was "largely temporary" because of bad weather and the West Coast ports dispute, and the economy's underlying fundamentals remained strong, he said.

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