The U.S. economy slowed nearly to a halt in the first three months of the year as exports plunged, oil companies slashed business and a rotten winter helped keep consumers indoors.
The economic slowdown, reflected in government data released Wednesday, was sharper than analysts had anticipated and creates a puzzle for employers and policymakers, who are trying to determine whether the annualized 0.2 percent growth between January and March is attributable to temporary factors or is a signal of broader problems.
Sorting out an answer will take at least several more months, but it leaves greater uncertainty about an economy that had until recently been among the world’s best performers. The United States faces challenges not only from a strong dollar, a drag on growth, but also from an oil price decline that has stunted one of the nation’s most bustling industries.
The latest economic data may nudge back the timetable for the Federal Reserve to raise rates, which have stayed close to zero for 6
Economists now expect that the central bank will hold off until the second half of the year on its rate hike while gauging the direction of the economy, but the Fed did not offer any new hints Wednesday about its timing.
“This economy is still showing a lot of fragility,” said Diane Swonk, a chief economist at Mesirow Financial, a financial services firm.
The quarterly data provided the most complete picture yet of the economic impact delivered by low oil prices. Lower prices at the pump have helped bolster Americans’ wallets, but since the price slide began in October, the number of American drilling rigs at work has fallen 60 percent and oil companies have shed some 30,000 jobs. In the first quarter, according to the Commerce Department, mining investment declined by $26 billion, or nearly 17 percent. Had investment merely remained flat, the annualized gross domestic product would have been 0.6 percentage points higher.
In the fields from North Dakota to Texas, oil production has not dropped in tandem with investment, because drillers have been focusing resources on their most efficient wells. But exploration for new discoveries is particularly capital-dependent, and private and public oil companies say new projects — with oil below $60 per barrel, compared with more than $100 per barrel last year — would probably lose money.
“Our philosophy is to batten down the hatches, make it through the bad times and get some equilibrium,” said Mike Steele, president and chief executive of Oklahoma City-based Kirkpatrick Oil. Steele said the company has cut its exploration budget by 80 percent.
As major economies weaken overseas, the U.S. dollar has gained strength. Though this has some benefits — imports are cheaper, American vacationers gain power — it also makes U.S. products pricier overseas while widening the trade deficit, a drag on growth.
In the first quarter, the export of goods and services slowed 7.2 percent. The export of goods alone slowed 13.3 percent, the sharpest decline since the Great Recession. The negative impact of trade was even greater in the first quarter than the impact of oil: The widening deficit reduced annualized GDP growth by 1.25 points. In other words, it turned a period of modest national growth into one with nearly no growth.
Though it is unclear whether the dollar’s ascent is nearing an end, “trade will continue to be a drag on growth in the near term,” Scott Hoyt, a Moody’s Analytics senior director of consumer economics, wrote in an e-mail.
Still, many analysts say the United States is likely to snap back into gear for the rest of the year, following the pattern of 2014, when growth was slow in the winter and then picked up. They note that the labor market is still strong, consumer confidence is high, and warming weather should lead to an uptick in spending. In addition, the nation was also tripped up by another temporary factor in the first quarter — a labor dispute at West Coast ports that caused supply-chain interruptions throughout the country.
Consumer spending is the biggest driver of U.S. economic growth, and the pace of purchasing in the first quarter grew 1.9 percent — decent, but down from the 4.4 percent pace at the end of 2014. For now, Americans are electing to save rather than spend the extra cash they are getting from cheaper gasoline. But some economists predict that will change, in the form of better vehicle and retail sales, as the weather warms.
“I believe it’s temporary,” Paul Ashworth, a chief economist at Capital Economics in Toronto, said of the slowdown. “A really cold winter appears to have affected consumer spending pretty dramatically.”
GDP — the measure of all goods and services produced by an economy — can be volatile in the quarterly readings, pulled up or down by government spending, tax policy and manufacturing, among other things. The numbers released Wednesday are preliminary and will be revised in May and June.
Growth in the first quarter was down from the 2.2 percent pace in the final quarter of 2014 and the 5 percent pace in the third.
Over the past three months, the U.S. economy has shown signs of weakness that led markets to anticipate lower GDP growth for the quarter. Home sales and consumer spending were tepid. Manufacturing and construction hit the skids. Though hiring was fair between January and March — the nation added 591,000 jobs in that span — it was a step back from the 973,000 jobs created in the last quarter of 2014.
Most economic figures, including GDP, are seasonally adjusted, meaning they are controlled for normal weather patterns. But an unusually brutal winter can still cause havoc with the numbers. Macroeconomic Advisers, a St. Louis-based research group, says the severe winter trimmed 0.8 percentage points from the annualized first-quarter figure.
Wells Fargo said in a research note that the U.S. economy “looks poised to repeat the pattern it exhibited in 2014 — a weak Q1 followed by a rebound back to steadier growth for the remainder of the year.”