ECONversations: Despite Rough Start to 2015, Economy Still on Track - June 23, 2015
The economy's weak performance in the first quarter was disappointing, but it does not materially change the Atlanta Fed's assessment of the economy in 2015, said executive vice president and research director Dave Altig during a recent ECONversations webcast.
According to the Bank's forecast, gross domestic product (GDP) growth should resume a more moderate pace in remaining quarters, expanding by 2.1 percent for the year.
In the latest of the Atlanta Fed's economic and policy sessions, Altig discussed several factors—some structural, others temporary—that weighed on the economy last quarter. For instance, severe winter weather across much of the country shaved an estimated 0.7 percentage point from growth, he said. Yet weather effects are temporary and some of that lost economic activity will likely show up in later quarters, blunting the overall impact on growth, he added.
Lower oil prices, stronger dollar are mixed blessings
Two structural factors, the steep decline in oil prices and the strong dollar, also had a rather significant impact on growth. Both developments are typically viewed positively, but in the near term they've been more of a mixed blessing for the economy, Altig noted.
That's partly because the United States is now a major consumer and producer of energy. As a result, investments in mining and oil fields have accounted for a growing share of overall business investment during the past 15 years, he explained. So while falling prices at the pump have benefited consumers, the dampening effect of lower oil prices on energy-related investment trimmed an estimated 0.6 percentage point from first-quarter GDP, according to Atlanta Fed analysis.
Meanwhile, the large first quarter's large trade deficit—likely driven in part by the stronger dollar's effects on economic activity through the manufacturing exports channel—accounted for about 1.9 percentage points from growth last quarter (this figure has been updated since the webcast to reflect revisions from the U.S. Bureau of Economic Analysis).
Headwinds should dissipate in later quarters
The Atlanta Fed's outlook for the rest of 2015 largely depends on whether the effects of these structural factors dissipate. If the recent stabilization of the dollar and energy prices continues, the headwinds that restrained growth quite significantly last quarter should eventually disappear, Altig said.
ECONversations are high-level updates on economic and policy issues and offer the public a chance to talk with Atlanta Fed experts.
Following his presentation, Altig fielded questions from the online audience and addressed several more in a related macroblog post. The information below, prepared in response to one of those questions, clarifies the effect of the U.S. dollar's appreciation on first-quarter GDP growth.
Stay tuned for the next ECONversations session in September.
Clarification to video response: (Updated 6/24/15)
Authored by Dave Altig
If you watch (or watched) the webcast, you would note that I referred to the "dollar influence" as one of the factors that was a presumed culprit in dragging down first-quarter growth. That prompted this remark from listener Michael Gapen (head of Barclay's U.S. economics research unit):
I would like to follow up with your estimate of dollar strength and its effect on economic activity. If I recall correctly from your presentation, you said that you see the prior appreciation in the dollar as subtracting 1.75pp from growth in the first quarter. This seems quite large in context of available research on the elasticity of the trade balance to movements in the foreign exchange value of the dollar. For example, we find that a 10% permanent appreciation in the real effective exchange rate causes a cumulative widening in the nonpetroleum trade deficit of roughly 0.7% of GDP. Accounting for some modest offset from lower prices on domestic consumption, we estimate a 10% appreciation would cause real GDP growth to fall by 0.4–0.5pp over a four-quarter horizon.
Good catch on that. What I was loosely referring to as the "dollar effect" is actually just the arithmetic effect of net exports on Q1 GDP growth. Our estimates of exchange rate effects alone would be in the ballpark of Barclay's, so there was a lot more going on with the "trade effect"—a more accurate label—than can be reasonably accounted for by the direct effect of dollar appreciation (which in any event is both cause and effect).
In the webcast exercise to cumulatively "add back in" economic factors, the same methodological qualification also applies to the 0.6 percent growth effect labeled "oil investments." Literally, that number is just the arithmetic effect of business investment spending on energy and mining related structures. In this case, however, it is a bit easier to draw a straight connection from oil prices to the investment number, and the number itself is reasonably close to our statistical model estimates. (The other two adjustments—"bad weather" and "mismeasured seasonal"—are in fact model-based, the former taken from Atlanta staff estimates and the latter from a range of estimates by other researchers.)
In any event, our conclusions were not changed (and we did not expect them to be changed) by the June 24 GDP revision by the U.S. Bureau of Economic Analysis.