First-Quarter Slump Less Daunting as U.S. Consumers Spend

Updated on
The American Rebound Is Happening: O'Neill

The world’s largest economy suffered a smaller setback in the first quarter than previously estimated as American consumers spent a little more.

Gross domestic product shrank at a 0.2 percent annualized rate, revised from a previously reported 0.7 percent drop, Commerce Department data showed Wednesday in Washington. The increase in household purchases exceeded the median forecast of economists surveyed by Bloomberg.

Consumers are leading a snapback this quarter as an improving job market and bigger income gains boost auto and home sales, bolstering Federal Reserve projections that the slump was temporary. Still, pockets of weakness remain as lower oil prices hinder investment in the energy industry and a firm dollar restrains global demand for American products.

“What we are seeing here does validate the story that the first-quarter weakness was transitory,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, who correctly forecast GDP. “The consumer is coming back to overall decent growth.”

Stocks fell, halting two days of gains that brought equities near a record, as Greek debt talks dragged on. The Standard & Poor’s 500 Index dropped 0.7 percent to 2,108.58 at the close in New York.

The reading on first-quarter GDP matched the median forecast of 76 economists surveyed by Bloomberg. Estimates ranged from a decline of 0.5 percent to an increase of 0.4 percent. The economy grew at a 2.2 percent pace from October through December.

Yellen’s View

“Part of this weakness was likely the result of transitory factors,” Fed Chair Janet Yellen said in a press conference last week after policy makers met to discuss the outlook for monetary policy. “Despite the soft first quarter, the fundamentals underlying household spending appear favorable, and consumer sentiment remains solid.”

Central bankers signaled a pickup in the economy will keep them on track to raise interest rates this year, though subsequent increases are likely to be gradual.

Household consumption grew at a 2.1 percent annualized rate last quarter, revised up from an initial estimate of 1.8 percent. The increase reflected larger outlays on food and transportation.

The median forecast in the Bloomberg survey projected consumer spending would be revised up to 1.9 percent, after a 4.4 percent gain in the fourth quarter.

Incomes Rise

Spending has held up as employment improves. After-tax income adjusted for inflation grew at a 5.3 percent annualized rate in the first three months of the year, the biggest gain since the end of 2012, the Commerce Department’s figures showed. Because earnings increased more than spending, the saving rate rose to 5.4 percent from 4.7 percent at the end of 2014.

Recent data indicate households are starting to spend more of the money freed up by the drop in fuel costs. Retail sales advanced 1.2 percent in May, reflecting broad-based gains from car dealers to clothing outlets and department stores. That followed a 0.2 percent gain in April.

Auto sales remain a bright spot. Cars and light trucks sold at a 17.7 million annualized rate in May, the strongest pace since July 2005, data from Ward’s Automotive Group showed.

Households are also plunging back into the real-estate market, led by a pickup among first-time buyers. Combined sales of new and existing houses climbed to a 5.9 million annualized rate in May, the most since June 2007.

More Revisions

This was the third GDP reading for the quarter, with future updates coming once a year in July as more detailed data become available.

When revisions are issued on July 30, the Bureau of Economic Analysis has said it will address the so-called residual seasonality that some economists have said has caused first-quarter data to be persistently weak. That has sparked a debate about the extent of the bias, with the Fed Board and regional Fed banks jumping into the fray.

First-quarter growth has underperformed the rest of the year by about 1.6 percentage points to 1.7 points on average, based on a range of results from those who believe the figures are faulty.

The Commerce Department’s data on earnings highlight the controversy. Gross domestic income climbed at a 1.9 percent pace in the first quarter, also revised up by a half percentage point, Wednesday’s report showed. While theoretically the changes in GDI and GDP should match over the long term, the readings can diverge from quarter to quarter.

The first estimate of second-quarter GDP is also scheduled for July 30. The economy will expand at a 2.5 percent rate from April through June and average 3 percent growth in the last half of the year, according to the median projection of economists surveyed by Bloomberg from June 5 to June 10.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE