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US Economic Growth Slowed in 1Q16, but Does This Really Call for a Slower Rate Hike?

David Ashworth

The Fed's Slow Road Ahead: Reading April's FOMC Statement

(Continued from Prior Part)

US economic growth slower than expected

One day after the April 2016 monetary policy statement was released by the US Federal Reserve, the BEA (Bureau of Economic Analysis) announced that US economic growth slowed to a 0.5% pace in 1Q16. Several consensus estimates had estimated the pace to be 0.7%. This was the first advance estimate of GDP growth in 1Q16. The BEA releases three estimates of economic growth per quarter.

Slow growth in the first quarter of the year is not unusual for the US economy, however. From 1Q10 until 1Q16, there have been only two instances in which US economic growth in the first quarter was not the slowest in the year.

But unlike in previous years, a harsh winter was not the reason for constrained economic activity. In 2015, a harsh winter had hampered homebuilding activity and kept shoppers indoors, thus impacting retailers (JCP) (M) (JWN). But this wasn’t the case in 2016, as winters were much milder due to the “el Niño” effect. And even after a harsh winter, the US economy has usually grown a shade faster, as in 1Q15. The slow start in 2016 is thus not a good sign.

Reasons for slow growth

US economic growth slowed in 1Q16 as nonresidential, or business fixed investments, and low global demand hurt economic output. The housing market was an exception and (combined with consumer spending) was able to keep the economy growing.

Growing consumption is good news for ETFs like the Consumer Staples Select Sector SPDR ETF (XLP) and the Consumer Discretionary Select Sector SPDR ETF (XLY) as well as for mutual funds like the Harbor Capital Appreciation Fund Investor Class (HCAIX) and the Fidelity Blue Chip Growth Fund (FBGRX). These invest sizable portions of their assets in consumer-related sectors.

Exports

Overall, exports declined by 2.6% in 1Q16 over one year ago, while exports of goods fell by 3.4%. Federal government spending fell by 1.6% in the quarter, with defense spending down by 3.6%.

In its April 2016 monetary policy statement, the Fed observed that “growth in economic activity appears to have slowed.” Slowing economic activity could delay further rate hikes in the US. Policymakers will not raise rates until they’re sure that the economy can absorb those rate hikes, because rate hikes have decelerating impacts on economies.

But although consumer spending is healthy, business investments look worrisome. Let’s examine these two indicators in the next part.

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