Economic update: One-time events lead to soft 1Q growth

U.S. economic reports released last week indicate first quarter growth was soft, but this was likely the result of one-time events rather than pointing to a trajectory of weaker activity in coming quarters.

The consumer seems to be recovering from winter storms, based on a rise in April’s preliminary University of Michigan Consumer Sentiment Index, and a recovery in retail sales for March, which rose for the month after declines during the first two months of the quarter.

The business sector may take more time to recover, with industrial production declining 0.6% in March and slowing nearly 1% overall for the quarter. Low oil prices and declining rig counts are leading to declines in production in mining and the oil patch, although we have not yet seen the impact in oil output. Housing is more likely to be a leading investment factor in coming months due to rising household formation and an increase in sales and builder confidence.

Consumer prices rose 0.2% in March, both including and excluding food and energy prices, likely easing some of the markets’ concerns of U.S. deflationary pressures. The modest rise in the general level of prices, despite low energy prices, seems to indicate domestic demand remains relatively healthy and is likely not seeing softer demand or possible negative effects from a rising U.S. dollar.



Gross domestic product (GDP) growth for the first quarter slowed in China to a year-over-year rate of just 7%, indicating the economy likely continues to suffer from relatively tighter monetary and credit policies. Growth in most key economic indicators also points to slower activity in coming months. Local stock markets have seen robust performance of late, with the tenor of policy from the People’s Bank of China moving toward looser policies, but only in certain areas and not within the real estate sector.

Last week regulatory authorities announced policies to ease speculative pressures, tighten margin rules, and increase two-way flows with the Hong Kong stock market. These policies seem to reflect the government’s preference to create two-way trade in the securities markets, as they have done recently with the currency market, to discourage the formation of manias or panics. Economic growth, in the meantime, is likely to remain slow unless macro policies shift to expand fiscal spending.

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Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.

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