US economy fell into contraction in Q1, down by 0.7%

WASHINGTON (ICIS)–The US economy contracted by 0.7% in the first quarter this year, the Commerce Department said on Friday, as US export trade, business investments and local government spending all declined and consumer spending slowed.

In its second estimate of the nation’s first quarter economic performance, the department said that the 0.7% downturn in gross domestic product (GDP) was in contrast to its initial 29 April estimate of 0.2% GDP growth.

US GPD had expanded by 2.2% in the fourth quarter of 2014 and followed a 5% boom in the nation’s output in the third quarter.

The department said that its downwardly revised estimate of first quarter GDP was in part driven by a deceleration in consumer spending, a category that the department calls personal consumption expenditures (PCE).

US PCE did increase in the first quarter, rising by 1.8%, but that marked a substantial slowing compared with fourth quarter consumer spending growth of 4.4%.

Such a slowdown in household outlays has substantial impact on the economy because consumer spending accounts for as much as 70% of all US production and commercial activity.

White House senior economist Jason Furman noted that the slowdown in consumer spending in the first quarter was in part because “consumers were saving the windfall from lower oil prices”. 

US retail gasoline prices fell by $1/gal in the second half of 2014, a savings of some $700 per household.  But many consumers elected to bank those savings instead of spending.

The fact that savings rates rose so strongly in the first quarter – up by 0.8% in what Furman called “an unusually large increase” – suggests that consumers are worried about near-term economic prospects.

In another key area of the economy, manufacture and sale of durable goods rose by 1.1% in the first quarter of this year, but that too was a considerable slowdown from the fourth quarter gain of 6.2%.

Also telling was the sharp first quarter reversal of non-residential fixed investment, a category that includes construction of factories, office buildings, utilities, shipping facilities, hospitals and other structures.

Non-residential fixed investment decreased by 2.8% in the first quarter in contrast to the 4.7% growth rate seen in the fourth quarter.

In addition, US exports contracted by 7.6% in the first quarter, essentially wiping out the 4.5% gain recorded for the fourth quarter.

Meanwhile, US imports of foreign goods grew at 5.6% in the first quarter, down from the 10.4% growth rate in the fourth quarter but still an increase that stands in contrast to the downturn in exports.

Imports count as a negative to the economy.

State and local government spending fell by 1.8% in the first three months of this year, wholly offsetting the 1.6% gain recorded for the fourth quarter.

The first quarter’s 0.7% GDP decline might have been worse but for a 0.1% increase in federal spending compared with the 7.3% decline in federal outlays seen in the fourth quarter last year.

The first quarter contraction comes in the wake of an outlook by the Federal Reserve Board predicting moderate US GPD growth this year and next of only 2.5%.  But with the first quarter performance in negative territory, the nation’s economy might have a hard time meeting even that modest growth forecast.

However, a key measure of chemicals industry output suggests that the overall US economy could pick up late this year.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy