The mystery behind poor first quarter growth in the US
by William Baunton
Wed 24 Jun 2015
What the chart shows: Quarter-on-quarter real GDP growth (adjusted at annual rates) for the US since 2010. First quarters are highlighted in orange.
Why it is important: Since 2010 the US, the world’s largest economy, has returned to steady, although not stellar, growth of around 2% per annum. However, almost every year in that period is pulled down by a very poor first quarter performance and 2015 has begun in the same fashion. The Bureau of Economic Analysis, the US agency charged with producing economic data, initially recorded growth (adjusted at an annual rate) in the first quarter of this year at 0.2% off the back of 2.2% growth in the previous quarter. As in previous years, last month the BEA then revised the first quarter growth figure down, in this case by 0.9 percentage points to a contraction of 0.7%. It has since been revised this week again to a contraction of 0.2%. Despite this upward revision, something is clearly amiss.
Historically, growth has dipped in the first quarter compared with the rest of the year due to seasonal factors such as weather disruptions. Although the BEA does include a seasonal adjustment in the figures, this clearly does not take account of the full extent of metrological conditions. As well as an exceptionally harsh and snowy winter across the US, the BEA cited as reasons for the contraction declines in ‘goods exports, notably of capital goods and of autos and parts’ as well as reductions in business investment and state and local government spending.
The disparity between quarters was particularly stark in 2014. Growth was running at 3.5% in the last quarter of 2013. Three months later in the first quarter of 2014 the US economy was calculated to have contracted 2.1%. The following three quarters then reverted to solid growth of 4.6%, 5.0% and 2.2%, as shown in the Chart. Since 2010, significantly weaker or negative growth has occurred in the first quarter four times, clearly pointing to an irregularity, most likely in the method the BEA carries out its seasonal adjustment. Since 2010, the first quarter has averaged 0.5% in annualised quarter-on-quarter GDP growth. Second quarter growth over the same period averaged 3.0% while the third and fourth quarters averaged 3.1% and 2.6% respectively. This consistent irregularity needs investigation, and almost certainly changes to the adjustment process.
The BEA has said it will look into its methods, with a review due to produce findings on 30 July. This could lead to a very different US growth story since the financial crisis. Barclays Chief US Economist Michael Gapen and economist Jesse Hurwitz believe that growth in the first quarter of this year was actually 1.8%, a full two percentage points higher. They believe ‘residual seasonality’ weighs upon the figures, and once removed, may paint a very different picture of the recovery of the US economy. Calculations show that if growth in first quarter of 2014 was revised to around 0.2%, growth in 2014 would have actually reached 3% per annum.