Winter of discontent: Some factors slowing US growth may linger, while others will pass

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In this March 31, 2015 photo, Roy Livesey marks a pallet of 2x4's at the Allegheny Millwork and Lumberyard in Pittsburgh. The Commerce Department releases first-quarter gross domestic product on Wednesday, April 29, 2015. (AP Photo/Gene J. Puskar)


WASHINGTON — The U.S. economy nearly stopped growing in the January-March quarter, squeezed by a combination of factors that will either fade (a harsh winter) or persist (a stronger dollar).

Growth was a barely discernible 0.2 percent annual rate in the first quarter, the Commerce Department said Wednesday. That's the poorest showing in a year and a sharp deceleration from a 3.6 percent rate in the second half of last year.

Most economists expect growth to rebound in the coming months as short-lived problems, such as a West Coast port strike, dissipate. But the rebound isn't likely to be that healthy, as the high value of the dollar and other trends continue to weigh on growth. Several economists slashed their forecasts for the April-June quarter to 2.5 percent from roughly 3.5 percent.

"It's hard to sugar-coat today's number," said Michael Feroli, an economist at JPMorgan Chase. "It was disappointingly soft."

Here are the key factors behind the first quarter's weak showing, and which are worth worrying about.

ANOTHER HARSH WINTER

For the second year in a row, freezing temperatures and snowstorms delayed homebuilding, kept consumers away from shops and weighed down the economy. Ethan Harris, global economist at Bank of America Merrill Lynch, estimates it shaved 0.5 percentage points from growth. Consumer spending growth fell to just 1.9 percent, down sharply from 4.4 percent in the previous quarter.

SHOULD WE BE WORRIED?

No. Spending should rebound now that the snow has melted. Strong hiring and lower gas prices, compared with a year ago, should give Americans more spending power.

STRONG DOLLAR SLAMES EXPORTS, PROFITS

Exports of U.S. goods plummeted 13.3 percent, the most since the first quarter of 2009 during the depths of the recession. Imports rose slightly, widening the trade deficit and slashing 1.25 percentage points from growth. The strong dollar is partly to blame: it has jumped 19 percent since last June. That makes U.S. exports more expensive and imports into the U.S. cheaper.

SHOULD WE BE WORRIED?

Yes. The dollar is expected to remain strong, given that the Federal Reserve will likely start raising short-term interest rates later this year. That makes it more profitable for foreigners to invest in the U.S., boosting demand for the dollar. Harris forecasts the stronger dollar will cut growth this year by 0.5 percentage points.

STRIKE SHUTS DOWN PORTS

A labor dispute at West Coast ports is also partly to blame for the wider trade gap. It delayed the shipment of exports and imports and may have cut 0.2 percentage points from growth, Harris estimates.

SHOULD WE BE WORRIED?

Maybe. The strike is over, which should boost exports in the April-June quarter. But imports may also come in faster, potentially worsening the trade gap and slowing growth.

GOODS PILE UP

Goods and raw materials piled up in warehouses across the country at the fastest pace in more than four years. This trend actually added 0.74 percentage points to growth because companies had to produce those goods. Without the increase in stockpiling, the economy would have actually shrank in the first quarter.

SHOULD WE BE WORRIED?

Yes — because this positive trend is almost certainly temporary. The big increase in inventories likely occurred because sales slowed. That means companies will focus on clearing their warehouses and store shelves in the coming quarter, reducing their need for new products.

CHEAPER OIL CUTS BUSINESS INVESTMENT

Sharply lower oil prices in the past year have caused oil and gas companies to cut back on drilling and exploration. Few new wells are being dug, and the number of rigs in operation has fallen. That caused investment in a category that includes oil and gas to tumble by 48.7 percent. The plunge dragged down overall investment in structures, which includes rigs, by 3.4 percent, the weakest showing since the fourth quarter of 2009.

SHOULD WE BE WORRIED?

Yes. Most economists expect cheap oil will weigh on business investment for at least one more quarter. And with profits being slammed by the strong dollar, which makes overseas earnings less valuable, companies are reluctant to spend elsewhere. Investment in computers and other equipment was essentially flat last quarter. Megan Greene, an economist at John Hancock Asset Management, says corporate managers aren't confident enough to invest: "They're tearing their hair out over the strong dollar."

WACKY DATA

From 2010 through 2014, growth in the first three months of the year has averaged 0.6 percent, while it has averaged 2.9 percent in the other three quarters, according to Goldman Sachs. Those figures have made some economists wonder if the government's seasonal adjustment is playing a role. Most economic data is seasonally adjusted to remove the impact of regular patterns, such as the layoff of large numbers of temporary retail employees after the winter holidays. The Commerce Department says it is looking into the pattern to see if tweaks need to be made.

SHOULD WE BE WORRIED?

Not necessarily. Seasonal adjustments can impact quarterly growth patterns but shouldn't affect annual growth rates.

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