The U.S. economy ground nearly to a halt in the first three months of the year, according to government data released Wednesday morning, as exports plunged and severe winter weather helped keep consumers indoors.
The economy had expanded at a rate of 2.2 percent in the final three months of 2014 and at a rate of 2.4 percent for the year.
Economists, employers and policymakers now face the challenge of determining whether the slowdown is temporary — stemming mostly from an unusually snowy winter in the Northeast — or a sign of broader problems.
Hours after the fresh data was released the Federal Reserve said that winter slowdown was “in part” reflective of “transitory factors” and that “economic activity will expand at a moderate pace” going forward. Economists expect that the central bank will hold off until the second half of the year, gauging the direction of the economy, before raising interest rates for the first time in 6½ years. In its statement Wednesday, the Fed did not offer any new hints about the timing of its rate hike.
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.
“A weak GDP number starts to raise the concern that the economy has hit a soft patch,” said Jonathan Wright, an economist Johns Hopkins University who worked previously at the Federal Reserve. “But there are several reasons for discounting the quarter one data, weather being one.”
Still, some economists say the nation's problems go deeper. Business investment, normally a major engine of growth, has been sluggish for years. And more recently, consumers are electing to save rather than spend the extra cash they’re getting from cheaper gasoline.
Cheaper oil, too, is weighing on the economy. Since the global price of oil began its free fall last year, the U.S. oil rig count has fallen by more than half. American drillers, after several years of rapid expansion, reduced investment by more than $25 billion in the first quarter, according to Commerce Department statistics. Had oil investment remained flat in the quarter, the GDP would have been 0.6 percentage points higher.
“Our philosophy is to batten down the hatches, make it through the bad times, and get some equilibrium,” said Mike Steele, president and CEO of Oklahoma City-based Kirkpatrick Oil Company. 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.
In the first quarter, the trade deficit reduced the GDP by 1.25 annualized points. In other words, it turned a period of modest national growth into one with nearly no growth.
Though it’s unclear if 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.
Since the start of 2010, when the recovery began in earnest, the United States has had five quarters when growth was below 1 percent.
“You have to start worrying about the fragility of your recovery, and it’s clearly too fragile for the Fed” to begin raising rates, said Diane Swonk, a chief economist at Mesirow Financial. The latest quarterly growth figure, Swonk said, “takes June completely off the table” as an option for when to initiate the rate hike.
Over the past three months, the U.S. economy had shown signs of weakness that led markets to anticipate lowly GDP growth for the quarter. Home sales and consumer spending were tepid. Manufacturing and construction hit the skids. Though hiring was decent 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.
A similar pattern happened last winter, one of the coldest on record, when the economy contracted by 2.2 percent in the first quarter but then quickly bounced back.
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.”