The U.S. economy grew at a 0.2% annual rate in the first three months of 2015 according to the advance estimate from the U.S. Bureau of Economic Analysis. Economist consensus was for growth to come in at 1% for the quarter. The underwhelming print was driven by a decline in business investment and falling exports resulting from plunging oil prices and a stronger dollar. Harsh winter weather and a labor slowdown at West Coast ports also put a damper on GDP. Corporate fixed investment declined at a 2.5% annualized pace, and spending on wells and mines fell at a 48.7% annualized rate compared to an 8.1% gain at the end of 2014. Spending by state and local governments was also weak, falling at a 1.5% annualized rate, the greatest decline in three years. Unlike the street consensus, The Atlanta Federal Reserve was spot on with their 0.2% forecast for GDP in the first quarter. The Bank uses its “GDPNow” model to gauge the strength of the U.S. economy prior to the release of official numbers. Currently, the model is forecasting just under 1% growth for the second quarter of 2015. It will be interesting to see how accurate this model is in coming quarters. Finally, PCE deflator, which is the Federal Reserve’s preferred measure of inflation, was 0.3% for the month of April, slightly below March’s reading of 0.4%. Core PCE fell from 1.4 to 1.3%. Inflation has been the missing link in the Federal Reserve’s quest to raise interest rates. While Chair Yellen and the rest of the FOMC have indicated that they expect inflation to rise back to its 2% target over time, they will likely need to see PCE stabilize before they have the confidence to begin tightening monetary policy.
Sources: Bloomberg, Federal Reserve Bank of Atlanta