Global headwinds, weak business spending could continue to weigh on GDP in coming quarters
By Jeffrey Sparshott
Updated: April 28, 2016 – 6:39 p.m. ET
A sharp pullback in business investment and weak global demand dragged down an already-lackluster U.S. economy in the opening months of 2016, the latest setback in a bumpy expansion entering its seventh year.
Consumers and the housing market kept the U.S. from sliding backward, though only barely. Gross domestic product, the broadest measure of economic output, advanced at a 0.5% seasonally adjusted annual rate in the first quarter, the Commerce Department said Thursday. That marked the economy’s worst performance in two years.
Corporate executives and economists say turmoil across global financial markets in the opening weeks of the year may have restrained U.S. economic activity, with conditions improving somewhat after the Federal Reserve scaled back its expectations for rate increases and commodity prices began stabilizing.
“While all is not well with the U.S. economy, neither is the economy as moribund as the print on the first-quarter GDP report implies,” said Richard Moody, chief economist at Regions Financial Corp. “Consumer spending and housing will provide the main support going forward.”
Slow first quarters followed by a rebound have been common in recent years, leaving hope for better months ahead. The U.S. economy contracted in the opening quarter of 2014 and barely grew at the outset of 2015, only to bounce back and leave the economy on the same staid trajectory seen during much of the expansion. For all of 2015, GDP advanced 2.4%, the same as 2014.
Yet stronger global headwinds over the past year have served as an added restraint. Among the forces working against the U.S. expansion in recent months: Tepid demand from overseas and a strong dollar have led to a drop in exports, subtracting from growth. Cheap oil, meanwhile, has thrown business spending into disarray. Outlays for mining exploration and wells contracted the most on record in the first quarter.
The latest worry about the global outlook came Thursday when the Bank of Japan surprised many investors by declining to launch fresh stimulus measures despite a weak economic outlook. The BOJ and the European Central Bank have been among the institutions pushing interest rates into negative territory to boost their economies, moves that had weakened their currencies and pushed the dollar higher.
The Fed hasn’t budged on interest rates since December, when it raised its benchmark for the first time in nearly a decade. Fed officials initially expected to raise interest rates by a full percentage point this year, but in March downgraded their expectation to just half a percentage point amid the global economic turbulence.
After its latest meeting concluded Wednesday, the central bank highlighted the domestic economy’s mixed signals and remained ambiguous about whether it would move its rate target from a range of 0.25% to 0.5% in June.
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