The U.S. economy shrank in the first quarter, the third such decline since the expansion officially began in mid-2009. But when the data came out last week most economists chalked up the 0.7% contraction to temporary factors like weather, the strong dollar and the West Coast port strike. The calendar has turned to June and the data now coming in for April and May suggest any second-quarter rebound will be limited, at best: The Atlanta Fed's real-time GDPNow model predicts growth of just 0.8% for the April-June timeframe.
"At the beginning of this year there was a hope and expectation things would pick up," recalls Kevin Logan, chief U.S. economist at HSBC. "Now it's five months in [to 2015] and we're reassessing everything. This is a slow, disappointing expansion [and] doesn't seem like it's changing now."
A big reason for the econo-optimism at the start of the year was the sharp drop in gasoline prices, which many economists predicted would be a "windfall" for U.S. consumers. But Logan notes the biggest part of the decline came at the end of 2014, helping spur a 4.5% growth rate in consumption in the fourth quarter. "There was a shift upward in spending and now we're trending [flat] again," he says, as reflecting the 0% consumption growth in the personal income/spending figures released Monday. "Consumer spending has picked up a bit but not to drive the economy to the rate of growth we thought we were going to get."
(As an aside, when I suggested in mid-April the U.S. economy may have already peaked, people thought I was nuts. It's still a variant few but fewer people are laughing now. On the other hand, with personal incomes up 0.4%, the savings rate has risen, which is good for the individual but not so good for the overall economy, aka the paradox of thrift.)
But Yes, We Have No Inflation
The other big news in that same personal income/consumption release Monday was the Core Personal Consumption Expenditures (PCE) index, the Fed's preferred inflation gauge, rose just 0.1% in April and is now up only 1.2% on a year-over-year basis, down from 1.4% in March.
"Fed officials want to be reasonably confident inflation will return to the 2% level they're targeting but the data is moving in the opposite direction," says Logan.
Barring a sharp rebound in both growth and inflation, Logan believes the Fed will postpone its first rate hike until September or December, noting the strong dollar presents another headwind for both U.S. inflation and growth. Exports suffered the biggest drop in six years in the first quarter and although the greenback's strength has moderated of late, the Fed's own model shows the impact of a rising dollar occurs with a lag and increases over time, The WSJ reports.
"Domestically things have picked up...but the appreciation of the dollar is going to hold the economy back," says Logan, whose forecasts have been below consensus for both growth and inflation in recent years -- meaning he's been more accurate than most of his peers, not to mention the Fed.