GDP Slowdown: What’s Next For The Economy?

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This morning, the Commerce Department released the preliminary figure for 1st quarter Gross Domestic Product (GDP), and the results were not encouraging.

The initial reading shows that the economy grew at a snail’s pace—0.2%—in the first quarter, an outcome even more disappointing than the anticipated 1.0% growth experts predicted.

It’s no secret that economic growth tends to slow down in the first quarter. The holidays are over, and poor weather makes construction and travel challenging. Last year, the economy actually receded (-2.1%) in the first quarter, only to rebound and finish the year at a 2.4% growth rate.

Should Americans be encouraged by what lies ahead in 2015? Here are a few factors that will play a role in the GDP growth—or lack thereof—this year:

Strength of the Dollar. Last year’s recovery over the final three quarters came in an environment where U.S. currency was considerably weaker. In 2014, the Euro never fell lower than $1.22 against the U.S. dollar. Today, even with a recent surge in strength, the Euro stands at $1.10 against the dollar.

While strong currency can be positive for the consumer, it’s bad news for economic growth, as sales numbers and profits figure to be slashed. CNBC economists believe dollar strength alone will curtail economic growth by 0.6% this year.

Data. GDP is down in the first quarter—but so are new home building figures, manufacturing, retail sales and business investment. Industrial production as a whole declined at a rate of 1.0% in the first quarter—the first decrease since 2009.

Obviously, this wasn’t the case in 2014, which suggests any potential rebound in 2015 will lack the same momentum the economy enjoyed last year.

Consumer Spending. This is the single biggest factor in U.S. growth and activity, accounting for more than 2/3 of the economy. As such, consumer spending received a great deal of credit for the 2014 rebound. Buoyed by lower gasoline prices, consumer spending expanded at its greatest pace since 2006 in the fourth quarter of last year.

So what’s the problem? Well, those gas prices weren’t much higher in the first quarter of this year—but they will be over the summer. And the law of diminishing returns is rearing its ugly head—odds are that most of the windfall from those lower gas prices has already occurred.

For the immediate future, the focus on the GDP slowdown will center on interest rates, and when the Federal Reserve will make its first move. But there is reason to believe this year’s first-quarter slowdown may be more than temporary.

Phil Cannella
Partnered with CBS Radio Network, Phil Cannella reports on the issues most important to the American retiree.
Phil Cannella

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