ATLANTA — Real GDP grew at 0.2 percent for the first quarter of 2015, but Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business doesn’t think the factors that drove this stagnation are here to stay.
“After I read the GDP report, the word ‘WOW’ escaped my lips,” Dhawan wrote in his Forecast of The Nation, released on May 20. “‘WOW’ here stands for weather, oil and the world economy. The report showed clear damage from these three factors.”
Unusually cold weather in the Northeast drove non-durable goods consumption growth down to negative 0.3 percent (especially grocery purchases) in the first quarter. On the flip side, spending on utilities (heating) rose, but overall gasoline savings were socked away. Dhawan says that the weather factor is temporary, except for the Western drought, but the low oil price will start to creep up as U.S. fracking production declines.
“We’ve almost reached the bottom, with oil rig counts having dropped sharply with only a little bit to go,” wrote Dhawan. “But prices will not reach the heights of $120 a barrel anytime soon. I expect oil to start creeping up to $70 a barrel by year’s end and stay in that range for the coming year.”
The final contributing factor, the world economy, is facing problems on two fronts. First, China’s economy has failed to recover after a planned slowdown to curb inflation, affecting the emerging economies in particular because of supply chain connections. Second, the eurozone is encountering a strange situation of negative government bond yields due to repeated threats of a “Grexit” (Greece leaving the eurozone) and the trillion dollar bond-buying program of the European Central Bank.
Overall, these issues showed up domestically by contributing to a 7.2 percent decline in exports. “The three components of ‘WOW’ shaved off close to 2.5 percent of U.S. growth in the first quarter,” Dhawan said. He believes these negative effects can be offset as the country rebounds in the second quarter.
“Weather is a temporary factor. As the seasons progress, it will soon reverse course and add to non-durable consumption. Most of the numerical damage to the GDP is now behind us.” Another side effect of the stagnant first quarter GDP result is the delay in a potential Federal Reserve interest rate hike.
“Oil, the global economy and investment should have stabilized by the end of October,” Dhawan wrote. “This means that December is the earliest the Fed can raise rates.”
Highlights from the Economic Forecasting Center’s National Report
• Following a gain of 2.4 percent in 2014, real GDP grew at a stagnant 0.2 percent in the first quarter of 2015. Growth of 3.3 percent is expected for the second quarter, bringing the overall rate to 2.5 percent for 2015. It will expand at a better rate of 2.8 percent in 2016 and grow 2.7 percent in 2017.
• Business investment will grow a weak 3.2 percent in 2015, recover to 5.8 percent in 2016 and 6.4 percent in 2017. Expect jobs to grow by a monthly rate of 254,000 in 2015, 240,000 in 2016 and 232,000 in 2017.
• Housing starts will average 1.11 million units in 2015, rise to 1.19 in 2016 and 1.25 in 2017. Expect auto sales of 16.8 million units in 2015, 16.9 million in 2016 and 17.1 million in 2017.
• The 10-year Treasury yield will average 2.1 percent in 2015, and should rise to 3.3 percent before the end of 2017.
— Staff Reports