This month sees the American economy in its 107th month of expansion. The current period of growth dates back to June 2009, making the period the second-largest US economic expansion in history. It demotes to third place the 106-month growth period that spanned most of the Sixties – from February 1961 to December 1969.
The extended recovery has provided the Federal Reserve with the confidence to wind down the programme of quantitative easing (QE) launched in the wake of the 2008-09 global financial crisis and to nudge up interest rates – via six instalments of 0.25% – since the end of 2015. The most recent rise was last month and least two more rate hikes are expected during 2018.
However, the pace of recovery can be uneven. In recent years the success story has regularly suffered a brief setback in the first quarter of the year, thanks to a seasonal affliction dubbed the US ‘first-quarter GDP pothole’.
A slow start
In the same way that the ‘Beast from the East’ blasted the UK earlier this year and was blamed for crimping economic activity, several particularly bleak winters have temporarily slowed the wheels of US industry. Back in 2013-14, cold weather and deep snow resulting from the ‘polar vortex’ saw the American economy take a $5 billion hit from lost productivity and lower consumer spending.
However, other years have also got off to a slow start in the first quarter as gross domestic product growth (GDP) has dipped before picking up steam in subsequently. Indeed, between 2010 and 2017 the first quarter was weaker than Q2, Q3 and Q4 five out of eight times. This has led to analysts referring to the ‘first-quarter GDP pothole’ as a recurring phenomenon.
Certainly expectations were modest ahead of today’s preliminary estimate by the US government of GDP for Q1 of 2018. Reports suggested that the economy began the year by losing some of the steam in gained late last year as recovery from hurricanes Harvey, Irma and Maria boosted both consumption and corporate investment. In the third quarter of 2017, US GDP grew by 3.2% and eased only slightly in Q4 to 2.9%.
This meant that the US economy grew by 2.3% over the year against 1.5% in 2016. But 2017 got off to a subdued start, with GDP growing by just 1.2% in Q1 after being revised upwards from an initial estimate of just 0.7%
Looking to Q2
Ahead of Friday’s first projection of GDP for the first quarter of 2018 – which came in slightly better than expected at 2.3% year-on-year, or 0.6% up on the previous quarter – various estimates were put forward, with a slightly greater slowdown to 2.0% in Q1 from 2.9% in Q4 2017 pencilled-in by many analysts.
However individual estimates ranged from 1.5% at Barclays – which advised “incoming data during the quarter has suggested less momentum than previously anticipated” in a recent note to clients – to others confident that the figure would surprise on the upside and be as much as 3%-plus as President Trump’s $1.5 trillion of tax cuts agreed last December started to stimulate growth.
Paul Ashworth, chief US economist at Capital Economics called the initial estimate of 2.3% for Q1 “something of a disappointment” as the tax cuts “should have provided an immediate boost”.
However, there is general agreement that the slowdown in the first quarter will be short-lived. Some economists believe that wintry weather is less to blame for the soft Q1 numbers than a quirk in the seasonal adjustment methodology used by the Bureau of Economic Analysis. The BEA is currently revamping is methodology in response.
Most are confident that GDP will accelerate once more in Q2 and beyond, repeating the trend of the past few years. Ashworth himself predicts a Q2 figure of 3%and growth for 2018 as a whole to come in at 2.8%.
Financial services group HIS Markit, which published survey data a week ago, is among those predicting that a rebound is already underway. “The US economy picked up pace again at the start of the second quarter,” said Chris Williamson, its chief business economist. “The April Purchasing Managers’ Index (PMI) surveys registered the second-strongest monthly expansion since last October.”
Other economic data is favourable. The US unemployment rate has been at 4.1% for the past six months, the lowest percentage since 2000, and is on trend to ease further this year. Inflation is described as “warming up rather than heating up” with the consumer price index (CPI) currently at 2.4%, which could see the Fed respond with its next quarter-point rate hike as early as June.
In the meantime, upcoming data will show if American consumers have been encouraged to go out and spend more – offsetting some of companies’ concerns over President Trump’s tariffs on steel and aluminium and the prospect of a trade war developing with China, which has weighed on business investment.
Trump’s own budget proposals are based on an assumption that his tax cuts and federal spending plan will pave the way over the next decade for his goal for the US to regularly achieve annual growth of 3%. It remains to be seen whether that road ahead will provide a smooth ride, or a few more bumps from the Q1 GDP pothole.