GDP Growth and the Fed’s Perspective – Riding the Storm Out

The Bureau of Economic Analysis (BEA) released the advance estimate of real GDP growth for the first quarter of 2014. Real GDP grew at a 0.1% seasonally adjusted annual rate, a sharper slowdown from the 2.6% growth in the fourth quarter than we expected. The slowdown was broad based, with every major category subtracting from growth except personal consumption expenditures (PCE). PCE grew at a respectable 3.0% seasonally adjusted annual rate, but was still slower than the 3.3% rate last quarter.

The biggest drags on growth were from exports and investment. The slowdown in investment was expected based on an anticipated pullback in inventory investment, but severe winter weather was a surprise that constrained fixed investment in equipment and homebuilding.

The good news is that the drag from investment will turn into a positive as fixed investment rebounds from the bad weather, particularly homebuilding, and the effects of inventory rebalancing wane. We expect growth to bounce back in the second quarter and gain strength through the rest of the year.

This view of optimism going forward is shared by the Federal Reserve’s monetary policy arm, the Federal Open Market Committee (FOMC). In the statement released today following their two day meeting the committee characterized growth in economic activity as having picked up since the March meeting, following the adverse weather conditions.

But beyond the language of the statement, a more significant indicator of the FOMC’s confidence that the economy will strengthen was the decision to continue on course with the reduction to the Fed’s asset purchasing program. By announcing a further $10 billion reduction in monthly asset purchases the committee is signaling its belief that the economic recovery is proceeding consistent with their expectations based on the underlying strength of the fundamentals and that the weakness in first quarter growth was due to temporary factors.

One Response to GDP Growth and the Fed’s Perspective – Riding the Storm Out

  1. […] macroeconomic news, GDP growth in the first quarter was a disappointing 0.1% gain, with downward revisions expected. Weather impacts took a toll on investment components, including […]

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