Thursday, May 01, 2014
US Economy Contracts 1.0% in First Quarter. Aberration or Omen?
Troubling news: The U.S. economy shrank in the first three months of 2014.
Gross domestic product contracted at a 1.0% annual pace in the first quarter, according to the U.S. Bureau of Economic Analysis.
It's the first time that's happened in three years, and only the second time since the Great Recession ended in mid-2009. The last negative quarter was in early 2011, when growth fell by 1.3%.
Slumps in exports, housing and business investment, especially on equipment, were the main drivers behind the weak performance.
Some are blaming the impact of harsh winter weather for the downturn. If that's the case, we'll see a vigorous rebound in the second quarter. But I think the problems are much deeper than that.
The latest GDP figures are based on incomplete data and will be revised at least two more times in the coming months.
One way or another, it's a huge comedown since fourth quarter 2013 GDP was 2.6%.
I'm dubious that weather is the only reason for the pullback. Household incomes remain depressed, which is crushing demand and consumption.
In 2012, inflation-adjusted household income was $51,017. Yet, back in 1989, it was $51,681. Incredibly, household income is now lower than it was a quarter-century ago.
Additionally, Americans no longer have mortgage equity extractions to help fuel their spending binges, as they did in the previous decade. Mortgage equity withdrawal was responsible for more than 75% of GDP growth from 2003 to 2006.
However, in the forth quarter of 2013, net equity extraction was minus $46 billion, or a negative 1.5% of disposable personal income (DPI).
These are different times. The housing market remains on shaky ground more than six years after the bubble burst. Recent data shows weak building rates, as well as slow sales for both new and existing homes.
Sales of new single-family homes plunged 14.5% in March. New-home sales averaged an annual pace 434,000 in the first quarter. But sales had averaged 1.1 million annually from 2001-2005. Additionally, existing-home sales in March slowed to their slowest rate since July 2012.
These downturns compelled the federally controlled mortgage-finance giants Fannie Mae and Freddie Mac to recently cut their forecasts for the housing market’s performance in 2014.
It's little wonder.
Housing cut economic growth in the first quarter, as it did in the fourth quarter of 2013, resulting in the sector’s first back-to-back subtraction since the first half of 2009. Specifically, housing cut almost two-tenths of a point from the first quarter’s overall growth. That drop followed a cut of almost three-tenths of a point during the fourth quarter.
The median sales price of new homes sold in March was $290,000, the highest rate ever. The combination of rising prices and rates are creating a drag on sales, which could further undermine the economy.
The housing boom of the last decade was a boon to the economy. People weren't just buying houses; they were also remodeling and furnishing them. Those days are over.
It should surprise no one that the economy continues to struggle.
Economist Noriel Roubini says the US economy seems to grow only during a bubble, such as the Internet bubble of the 1990s and the housing bubble of the 2000s. He's right.
The Federal Reserve creates every bubble through its monetary policy. And it's doing it again. As a result of its zero interest rate policy (ZIRP), the Fed has spurred Wall Street's five-year bull market rally.
Yet, at the same time the nation continues to endure a weak five-year economic recovery. It's quite incongruous.
In essence, the stock market rally is benefitting a relative few. As Wall St. booms, Main St. continues to struggle.
Since the economic recovery began in mid-2009, annual growth has hovered around 2%, well short of the nation’s historical average of 3.3%.
Again, this is simply because there is less household income today than before the Great Recession. Yet, instead of continuing to spend more than they earn, Americans are finally showing a bit of restraint.
Though consumer spending rose 3% in the first quarter, the increase was largely due to big spikes in utilities (heating costs rose due to the cold weather), as well as higher outlays on health services related to the enactment of the Affordable Care Act (aka,Obamacare).
Given that millions of additional Americans are now purchasing health insurance, health-care spending, as a percentage of GDP growth, was the highest ever recorded. Consequently, spending on services jumped 4.4%, the biggest increase in almost 14 years.
The other side of the coin is that spending on goods rose a much narrower 0.4%, the weakest gain in nearly three years.
In essence, people are spending their money on necessities, not on luxury items, entertainment, vacations and other non-essential goods and services. Wages and employment simply aren’t allowing greater spending.
While average credit card debt per indebted household was $17,630 at the end of the first quarter of 2010, it has dropped to $15,191. That four-year decline is substantial.
Overall, consumer debt is now 9.1% below its 2008 peak of $12.68 trillion, according to the Federal Reserve.
Perhaps Americans have concluded that increasing their personal debt is not the same as having discretionary income. After all, overspending and an inability to manage debts is what helped to initiate the Great Recession in the first place.
All of this indicates that the economy will continue to struggle, and that growth will remain a challenge going forward.
It will be interesting to see if anyone continues to blame the 'weather', rather than the more obvious and uncomfortable realities behind our economic stagnation.