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Output Growth Disappoints; Labor Markets Show Strength

May 7, 2014 · Update in PDF PDF

Economic indicators released in March and April present a picture of modest growth so far in 2014. Output growth fell short of analysts’ already modest expectations for the first quarter. The employment situation was mixed in the transition from March and April. Job gains in April shifted to a higher gear, exceeding expectations, and the unemployment rate declined to its lowest level since September 2008, but other measures of labor market conditions were less sublime. Inflation measures turned in soft upward readings across the board, with core measures still well within their recent pattern of stability.

Output Growth Staggers in Advance Release

Real gross domestic product grew at an annualized rate of 0.1 percent in the first quarter, based on the Bureau of Economic Analysis’ advance estimate (Chart 1). This represents a sharp decline from last quarter’s 2.6 percent rate and is well below the recovery average of 2.4 percent. Real personal consumption expenditures (PCE) was the lone contributor; all other components took away from growth during the quarter.

Declines in residential (0.2 percentage points) and nonresidential investment (0.3)—the latter brought down exclusively by a pullback in equipment purchases—were in line with expectations of a downside effect from unusually harsh winter weather earlier in the quarter. Inventory saw the largest decline in investment (0.6 percentage points), indicating that weather was only part of the story behind the slower growth.

Net exports shaved off 0.8 percentage points from overall growth following a strong positive contribution in the fourth quarter. Nonetheless, the degree of deceleration was typical of postrecession movements, as shown in the chart. Government spending showed less of a drag than in the previous quarter, going from 1 to 0.1 percentage points.

The chart also illustrates that inventory investment—by a wide margin—and net exports and government spending have contributed more to volatility in output growth during the recovery than the other components.

PCE had another quarter of strong growth, contributing 2 percentage points. Notably, over half the increase in PCE was due to spending on health care services. Given the large contribution of health care services expenditures, revisions to the data will have a significant impact on later estimates of output growth.[1]

Labor Surveys Mixed but Show Overall Strength

The April payroll survey showed an improvement in labor market conditions (Chart 2). Total nonfarm employment grew by 203,000 in March and 288,000 in April. Private sector nonfarm payrolls increased by 273,000 in April, while the government sector added 15,000 jobs. Upward revisions to payrolls in January and February brought gains over those two months to a combined 366,000 jobs. For the year through April, nonfarm payroll gains have averaged 198,000 jobs per month. Other indicators, such as average hourly earnings and weekly hours, were essentially flat.

From the household survey, it was reported that the unemployment rate, which had stalled at 6.7 percent in March, declined dramatically to 6.3 percent in April (Chart 3). Importantly, April’s decline came as the labor force participation rate ticked down to 62.8 percent from 63.2 percent. Around two-thirds of a million people, most of whom had been unemployed over longer terms, changed their status from unemployed and either went back to work or dropped out of the workforce (Chart 4).

Inflation Measures Show Slight Uptick

Headline Consumer Price Index (CPI) inflation, on a 12-month basis, increased to 1.5 percent in March after dipping to 1.1 percent a month earlier. Headline PCE inflation was 1.1 percent in March on a 12-month basis, an acceleration from the 0.9 percent reading in February.

Core inflation measures, which have shown varying degrees of deceleration over the past two years, have been mostly stable during the past several months (Chart 5). CPI-based core measures—like the Federal Reserve Bank of Cleveland’s median CPI, the Atlanta Fed’s sticky-price CPI or the more conventional CPI excluding food and energy—have been steady in a range of 1.5 to 2.1 percent on a 12-month basis through March.

PCE-based measures have been running at a noticeably lower level, between 1.1 and 1.3 percent. The Dallas Fed’s Trimmed Mean PCE inflation rate—a good indicator of the underlying trend in PCE inflation, as well as a good predictor of future headline PCE inflation—has been steady over the past year, hovering around 1.3 to 1.4 percent on a 12-month basis.

Resurgence in investment is expected, as the slowdown caused by impeding weather conditions fades and diminished inventories are replenished. The strength of foreign markets ought to be monitored, however, because it may indicate a continued drag from net exports. The Blue Chip consensus projects an average of 3 percent growth (seasonally adjusted and annualized) for the remainder of the year. Combined with expectations for continued healthy job gains, further declines in the unemployment rate and improvements in other labor market indicators, this represents a healthy economic outlook and a definite acceleration from what initially seems to be a sluggish first quarter.

—Alan Armen

Note
  1. One challenge has arisen with estimating health care services expenditures because the preliminary monthly source data used to estimate health care services do not reflect the effects of the Affordable Care Act (ACA), so additional information on Medicaid benefits and ACA insurance exchange enrollments, as well as other related information, was used to prepare the estimates of consumer spending on these services. See “How Will the Affordable Care Act Affect BEA’s Measure of Personal Income and Outlays?” Bureau of Economic Analysis, February 2014.
About the Author

Armen is a research assistant in the Research Department at the Federal Reserve Bank of Dallas.

 

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