WASHINGTON – The U.S. economy remains on solid footing. Real GDP was little changed in the first quarter of 2015, but forecasters are expecting robust growth over the remainder of the year. Although weak export demand continues to weigh on economic activity in this country, strong fundamentals should support a firm uptrend in domestic spending.
Based on as-yet limited source data, the Commerce Department estimated last week that real GDP increased at an annual rate of 0.2 percent in the first quarter of 2015 following a gain of 2.2 percent in the fourth quarter of 2014. Unusually harsh winter weather likely held back growth in several categories, including consumer spending, which rose at an annual rate of 1.9 percent, down from a pace of 4.4 percent in the previous quarter. In addition, residential investment growth slowed to 1.3 percent from 3.8 percent in the fourth quarter. Meanwhile, net exports subtracted 1.3 percentage points from GDP growth amid lackluster growth abroad. In addition, business fixed investment declined 3.4 percent on a plunge in mining investment associated with the substantial decline in oil prices since mid-2014. Government spending also declined in the first quarter as state and local expenditures fell for the first time in a year.
Labor market conditions continued to improve in the first quarter of 2015, albeit at a slower pace than in 2014, when the U.S. economy saw its strongest year of job growth since 1999. The economy added an average of 197,000 jobs per month in the first quarter, compared with average monthly gains of 260,000 in 2014. The unemployment rate was 5.5 percent in March, 1.1 percentage points lower than a year earlier. While most measures of labor force utilization are normalizing, they suggest, on the whole, that the labor market recovery remains incomplete. The long-term unemployment rate, at 1.6 percent, and the rate of involuntary part-time employment, at 4.3 percent, are still materially elevated relative to their pre-recession range. Although much of the decline in the labor force participation rate in recent years is related to the retirement of the baby boomers, the rate is below what would be expected in a fully healed labor market. The employment report for April 2015 will be released at the end of this week.
The housing sector continues to present a mixed picture. Homebuilding activity began the year on a disappointing note, as housing starts and residential building permits each fell below their late-2014 levels. However, bad weather appears to have held back construction in some parts of the country, leaving the sector poised for some rebound in the current quarter. Indeed, home builder confidence increased in April, nearly returning to the nine-year high reached last fall. Moreover, household formation has picked up and is expected to boost housing demand in the future, together with ongoing improvement in the labor market and still-favorable levels of affordability. Mortgage rates have continued to trend down, and home prices are now increasing at a moderate pace, down from the double-digit rates of appreciation seen in early 2014.
Energy prices have risen somewhat in recent weeks but have reversed only a small portion of the large decline between mid-2014 and January 2015. The one-month futures price of West Texas Intermediate crude oil is currently trading around $59 per barrel, up about $10 over the past month but $41 lower than a year ago. Retail gasoline prices have risen roughly 50 cents over the last three months but are still relatively low; the U.S. average retail price of regular gas currently stands at $2.57 per gallon, about $1.14 lower than a year ago. The declines in energy prices have left consumers with more discretionary income to spend, although the resulting boost to demand has been partly offset by a decline in energy sector investment and employment.
Energy and import price declines have held inflation down over the past year. During the year that ended in March, the consumer price index fell 0.1 percent, compared with a 1.5 percent rise in the year-earlier period. Core consumer prices (excluding food and energy) rose 1.8 percent over this period, accelerating slightly from the 1.7 percent year-earlier pace. Core services price inflation continues to run at a moderate pace, while core goods price inflation has recently slipped into negative territory. Labor market slack continues to weigh on growth in worker compensation, but some pick-up is occurring—over the year ending in March, growth in the Employment Cost Index for private-industry workers accelerated to 2.8 percent. While this gain was the largest in nearly seven years, it remained below the 3½ percent average annual pace recorded in the decade prior to the recession.
Even including the tepid gain in GDP in the first quarter, the U.S. economy has expanded at an above-trend annual pace of 3 percent during the past four quarters. The underpinnings of growth remain favorable, and GDP growth is expected to rebound in the months ahead as many of the factors that restrained demand in the first quarter disappear or begin to recede. Consumer confidence is near an eight-year high, and improvements in labor market conditions continue to boost incomes. Household balance sheets are also in much better shape than they were a few years ago because of growth in home prices and equity prices as well as considerable progress in deleveraging. Fiscal policy is no longer a large drag on economic activity, and inflation is low and stable. As a result of these and other favorable fundamentals, a consensus of private forecasters is projecting a rebound in growth to an annual rate of 3.3 percent in the second quarter and roughly 3 percent over the second half of 2015.