WASHINGTON: The U.S. economy nearly stopped growing in the January-March quarter, squeezed by a combination of factors that will either fade (a harsh winter) or persist (a stronger dollar).
Growth was a barely discernible 0.2 percent annual rate in the first quarter, the Commerce Department said Wednesday. That’s the poorest showing in a year and a sharp deceleration from a 3.6 percent rate in the second half of last year.
Most economists expect growth to rebound in the coming months as short-lived problems, such as a West Coast port strike, dissipate. But the rebound isn’t likely to be that healthy, as the high value of the dollar and other trends continue to weigh on growth. Several economists slashed their forecasts for the April-June quarter to 2.5 percent from roughly 3.5 percent.
“It’s hard to sugar-coat today’s number,” said Michael Feroli, an economist at JPMorgan Chase. “It was disappointingly soft.”
For the second year in a row, freezing temperatures and snowstorms delayed home building, kept consumers away from shops and weighed down the economy. Ethan Harris, global economist at Bank of America Merrill Lynch, estimates it shaved 0.5 percentage point from growth. Consumer spending growth fell to just 1.9 percent, down sharply from 4.4 percent in the previous quarter.
Exports of U.S. goods plummeted 13.3 percent, the most since the first quarter of 2009 during the depths of the recession. Imports rose slightly, widening the trade deficit and slashing 1.25 percentage points from growth. The strong dollar is partly to blame: it has jumped 19 percent since last June. That makes U.S. exports more expensive and imports into the U.S. cheaper.
The dollar is expected to remain strong, given that the Federal Reserve will likely start raising short-term interest rates later this year. That makes it more profitable for foreigners to invest in the U.S., boosting demand for the dollar. Harris forecasts the stronger dollar will cut growth this year by 0.5 percentage point.
A labor dispute at West Coast ports is also partly to blame for the wider trade gap. It delayed the shipment of exports and imports and may have cut 0.2 percentage point from growth, Harris estimates.
Goods and raw materials piled up in warehouses across the country at the fastest pace in more than four years. This trend actually added 0.74 percentage point to growth because companies had to produce those goods. Without the increase in stockpiling, the economy would have actually shrank in the first quarter.
Cheaper oil has also slowed business investment.
Sharply lower prices in the past year have caused oil and gas companies to cut back on drilling and exploration. Few new wells are being dug, and the number of rigs in operation has fallen. That caused investment in a category that includes oil and gas to tumble by 48.7 percent.