The first estimates of the real growth of Gross Domestic Product for the first quarter were just released. The results were bad or not so bad, depending on how you measure the performance.
Real GDP only grew at an annual rate of 0.1 percent if you judge the first quarter of 2014 against the fourth quarter of 2014. This was "bad."
However, if you look at the year-over-year rate of growth of real GDP, which I focus upon, the rate of increase was 2.3 percent. This is only down slightly from the fourth quarter of 2013 year-over-year growth rate of 2.6 percent. Not so bad.
Over the past four years, real GDP growth was even more modest. In 2011, the fourth quarter-over-fourth quarter rate of increase was 2.0 percent. It was the same, 2.0 percent, in 2012 before it jumped to 2.6 percent last year.
The big question that is on everyone's mind is "How much did the bad weather in the first quarter impact the behavior of the economy?"
The first place almost everyone goes to in order to try and answer this question is residential investment. The year-over-year rate of increase in residential investment was only 2.3 percent, down from 6.9 percent in the fourth quarter of 2013 and down from double-digit increases the previous seven quarters before that.
Given that the rate of increase in residential investment had already dropped below 10.0 percent in the fourth quarter of 2013, the question then becomes one about how much of the decrease in the first quarter was due to financial conditions that had been slowing down the rate of growth in residential investment and the impact of the weather in just the first quarter.
I believe that the rate of growth in residential investment would have been down in the first quarter from the fourth quarter, but the inclement weather just made the results worse.
The next question, therefore, has to do with how much pickup should we see in the second quarter of 2014 given an improvement in the weather. Will there be any catch-up?
The indications for April are that growth may remain weak in the second quarter as well.
The expenditures of the federal government actually declined. But, federal government expenditures actually have declined, year-over-year, twelve quarters out of the last thirteen. The actual decline was 3.9 percent, which was the lowest year-over-year decline in the last five years.
Exports continued to increase but the year-over-year rate of growth declined, but so did imports. Net exports, therefore, fell slightly.
Nonresidential investment expenditures grew, year-over-year, in the first quarter at a 3.2 percent annual rate which was higher than the rate at which this item rose for the full year in 2013 which was at a 2.6 percent rate.
Overall, the statistics still indicate that economic growth in the United States is not robust, but, given the weather conditions in the first quarter of the year, the result was not that bad.
I am still sticking to my earlier forecast that real GDP for the full year, year-over-year through the fourth quarter, will be around 3.0 percent. I just discussed this forecast in my recent post "The Economy and Monetary Policy."
The interesting thing to me is that sticking with this forecast I have been called an optimist… not unlike those in the Obama Administration and the Federal Reserve. This is the first time in the seven years I have been writing these posts that I have been called anything like an optimist. Usually, I have been called just the opposite.
Furthermore, I really don't think that this forecast is all that optimistic. The economic recovery continues to be anemic. There is still a tremendous amount of uncertainty about the future of fiscal policy in the country… especially if the Republicans pick up a majority in the US Senate and thereby establish control of both houses of congress. Monetary policy is having little or no impact on economic growth. And, there is concern in the rest of the world about the growth prospects for China, Europe, Brazil, and India… among others.
In terms of the economic situation, I have continuously written that my belief is that the United States economy faces a substantial amount of re-structuring, something that cannot be achieved by the blunt application of fiscal policy or by excessive monetary growth. Re-structuring requires policies that deal with education, re-training, cultural patterns, and so forth. Policies of this nature take serious planning, commitment, and patience as they require lots of time to work through the economy. This effort is not happening at this time.
So, I will stick with my forecast of a 3.0 percent, year-over-year rate of growth for the US economy but still contend that this will only be a mediocre performance, not inconsistent with the results of the past four years. Decision makers just don't seem to me to be that confident in the future, although there may be some stirrings in the executive suites with respect to mergers and acquisitions. However, in the short run, mergers and acquisitions do not seem to increase economic growth.