The third and final data for real gross domestic product ("GDP") is out and reveals that the U.S. economy is faltering. According to Bureau of Economic Analysis, GDP shrunk 2.9% in the first quarter of 2014 contrary to the second estimate of 1% decline and the first estimate of 0.1% increase. This is the worst performance since five years. In the fourth quarter of 2013, real GDP had advanced 2.6%.
This leads to the obvious question about whether this decline is just a mirage of a derailing economy or a real hurdle in the path of recovery. Divided market sentiments are revealed as we lift the curtain on this debate.
Market experts believe that the contraction stemmed from an inclement weather condition that locked consumers indoors, hampered production and construction activities, and led to soft home and auto sales. Exports also played spoilsport, falling 8.9% during the quarter. This indicates that the European economy is still not completely out of the woods, while emerging nations such as China and Brazil slowed. Further, the mounting tension in Iraq may hinder growth prospects.
Consumer spending, which accounts for over two-third of the U.S. economic activity, also grew moderately by 1% in the quarter, down from the 3.1% jump anticipated, due to lower health care spending than earlier thought of and severe winter. Moreover, consumer spending was only up 0.2% for the month of May versus 0.4% gain envisioned. However, it improved from April, when consumer spending was flat.
The belief that the economy is on a recovery path might just have gotten weaker due to the above factors. However, there is a section of economists, who believe that the softness in the first quarter was only temporary. They are hopeful that a much favorable weather condition now, an improving labor market, recovery in the housing market and surging demand, will translate into strength in the U.S. economy as the year progresses. Moreover, an increase of 0.4% in personal income in May also add to the positives.
The Federal Reserve continues to scale down the monthly bond buying campaign showing rebounding economic activities. The purchase of mortgage-backed securities and Treasury securities would be reduced for the fifth time to $35 billion in July from $45 billion. Looking back, the Federal Reserve had initiated a monthly stimulus program of $85 billion to boost economic growth and keep interest rates low.
On the other hand, consumer confidence – a key determinant for the economy’s health – has shown improvement. A recent Conference Board data suggested that Consumer Confidence Index increased to 85.2 in June 2014 from 82.2 in May 2014. What is inspiring consumer confidence is the improvement in the employment picture. The unemployment rate is hovering around 6.3%, the lowest in five years. The U.S. Department of Labor reported that initial jobless claims decreased by 2,000 to 312,000 in the week ended June 21.