AT the start of this month, with poor job figures having just cast a shadow over the US economy, Federal Reserve Bank of New York President William Dudley warned that first quarter gross domestic product growth figures might come in as low as 1 percent. Those figures were announced this morning, and in hindsight Dudley looks like an optimist: GDP growth was just 0.2 percent on an annualized basis, a steep drop from the previous quarter’s 2.2 percent.
Market reaction to the news was muted — partly because the March job figures had provided some warning and partly because there were some obvious explanations that seemed to point toward the slower growth being a temporary blip. The US economy has a habit of suffering a poor first quarter and recovering strongly over the year. The winter was a harsh one in important places, and contract negotiations affected ports on the West Coast, particularly in the first quarter. Such events are a fact of life when running a global economy and, while steps can and should be taken to mitigate them, if they are truly to blame then the US economy should rebound quickly.
But it is two other aspects that might have played into the slowdown — namely a high dollar value and a low oil price — that could herald a deeper downturn in the US economy.
In theory, the United States is supposed to be relatively immune to strong currency problems. With exports amounting to only 13 percent of US GDP, the losses to competitiveness created by a high dollar ought to be brushed off by the giant consumer economy. Theory does not always translate into practice however, and considering the dollar has not experienced a period of such sustained strength since the end of the last century, there is hardly a recent track record on which to rely.
The low oil price takes the economy even further into unknown waters, since the question marks hang over how much it has affected the fledgling shale industry, which is itself based on new technology and has been running at full pace for only a few years. Production remains strong, even with the lower value of its outputs, but increased layoffs could feed into higher unemployment and thus lower consumption, particularly in the shale states of Texas, North Dakota and Oklahoma. Meanwhile, a gloomier outlook for shale could decrease investment in the industry, which could also manifest in lower GDP growth. The educated view is that the benefits of low oil prices should outweigh these losses, as consumers and businesses find that their fuel costs have dropped. Still, there is the possibility that damage to the shale industry is having a larger drag effect on the overall economy.
It is important to note that this is a flash estimate, with a more considered revision due in three weeks — the preliminary estimate will come May 29, and a third revision on June 24 — and such revisions have been known to radically change the numbers (the average revision is about 1.25 percent). If the figure does turn out to be correct, it is important to wait for its sequitur before identifying a trend. This gloomy quarter for the United States could be just that — a gloomy quarter with temporary factors to blame, and the United States could soon return to growth as it did in 2014. However, the idea should not be discounted that this could also be the beginning of a downturn in the United States. If the latter were the case, the consequences would be felt around the world.
In November 2014, market commentator Nouriel Roubini was heavily quoted for saying that the global economy is flying on just one of its four engines, with the European, Japanese and Chinese economies all flattering to deceive. The situation has barely improved in the intervening months. A poor export figure and GDP target downgrade has continued China on its gradual descent from the highs of double-digit growth. In Japan, asset prices are soaring but with little reason for cheer in the underlying economy, as the Bank of Japan continues to pump vast quantities of money into its bond-buying. Europe admittedly has seen some signs of life in recent months, with low oil prices and cheap euros stimulating some improvements. But it is a long way from the kind of reliable positivity that could buoy the global economy.
While the four-engine metaphor has its limits, the point is valid that the world economy tends to have at least one source of positivity that it can gather around. It is possible that weather and industrial action were to blame for Wednesday’s low GDP figure. But if it does signify a return to low growth, assumptions will have to be revisited all over the world. Countries that had been building their economic strategies around a thriving US machine will have to abruptly come up with a plan B.
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