US economy stalled in Q1; Fed expected to pause on rates

The US economy stalled in the first quarter with consumers and businesses trimming spending and the strong dollar and West Coast port strike hitting exports.

The US Commerce Department said Wednesday that the world's largest economy expanded at an annual pace of just 0.2 percent in the January-March period, after 2.2 percent in the final quarter of 2014.

This will add to concerns about sluggish global growth and raise questions about the strength of the US post-crisis recovery.

The Commerce Department said the US economy expanded at an annual pace of just 0.2 percent in the January-March period, after 2.2 percent in the final quarter of 2014 ©Justin Sullivan (Getty/AFP/File)

A low number was anticipated after the modest 2.2 percent expansion in the final quarter of last year, but economists had on average expected a 1.0 percent growth rate.

The fresh data made it more likely that the Federal Reserve, slated to announce an update to monetary policy later Wednesday, will maintain plans to raise interest rates on pause for a little longer to be sure the downturn was an aberration and that the economy will resume solid growth in the current quarter.

- Temporary slowdown? -

"A stalling of US economic growth at the start of the year rules out any imminent hiking of interest rates by the Fed," said economist Chris Williamson at Markit.

"The slowdown looks temporary, as a rebound from the first-quarter weakness is already being signaled by forward-looking survey data, but the sustainability of any upturn is by no means convincing yet."

In a period beset by an extremely cold winter and the three-month port strike, business investment and consumer and government spending all slowed.

Households had been expected to loosen up purse-strings and increase spending with the savings garnered from plunging gasoline prices.

Investment in buildings and other structures contracted, likely due in a large part to the sharp pullback in the oil industry after the crash in oil prices, analysts said.

Export growth also contracted sharply. Part of that is due to the port strike, which saw imports and exports pile up on docks along the Pacific coast before labor groups reached a new contract deal in late February.

The other key reason has been the soaring dollar, which has made US exports less attractive in foreign markets.

The Commerce Department's growth estimate is only the first for the quarter, and revisions can be large as more data comes in, with some analysts, including Ian Shepherdson of Pantheon Macroeconomics, saying the expect the updated revised estimates to be higher.

Even so, Wednesday's data will likely reinforce instincts in the Federal Reserve to hold back on raising interest rates to see what happens in the second quarter.

- Signs of weakness -

The Fed, which was to end a two-day policy meeting with a revised policy statement, has for months been expected to start increasing the benchmark federal funds rate from the zero level in June.

But the growth slowdown could give it pause. The two indicators the Fed keeps its focus on, the jobs market and inflation, both continue to show signs of weakness.

The first quarter gross domestic product data says nothing direct about the labor market, but it pointed to a downturn in inflation, when the Fed's easy-money policies have aimed to stoke inflation toward a 2 percent target.

Because of that, analysts think the Fed will hold off on a rate increase to July or September to be certain the economy still has the strength shown over the past year.

Shepherdson said he expects the economy will show much more power in the second quarter.

"The key point here is that the underlying state of the economy has been distorted by the weather and the timing of the oil impact, which has depressed business spending before it raises consumption," he said.

"The latter is coming, and it will catch impatient investors who have prematurely written off the consumer rebound story."

Quarterly figures for US GDP, 2012-2015