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April 29, 2016

Recession Signs Rise in America

GDP growth in the United States fell significantly, growing just 0.5% in the first quarter of 2016.  Despite economists’ predictions of continued economic strength, real GDP growth was just 0.5% in the first three months of this year after rising 1.4% in the fourth quarter of 2015. Economists had expected 0.7% growth after downgraded estimates throughout the quarter, largely due to weak data from the housing, manufacturing, and export sectors. 
Again, weak consumer demand was behind the trend, as tapped out Americans struggle to meet economists’ expectations and spend more on goods and services. This caused the personal consumption expenditure (PCE) metric to rise just 1.9% after rising 2.4% in the fourth quarter of last year.
"The deceleration in real GDP in the first quarter reflected a larger decrease in nonresidential fixed investment, a deceleration in PCE, a downturn in federal government spending, an upturn in imports, and larger decreases in private inventory investment and in exports that were partly offset by an upturn in state and local government spending and an acceleration in residential fixed investment,” said the Bureau of Economic Analysis.
PCE is a favorite indicator of the Federal Reserve of aggregate demand, and weakness in PCE tends to lead to more accommodative monetary policy from the Fed
Recession Signs Rise
The weak growth has become a significant cause for concern among economists, while also dragging the stock market down after rallying consistently over the last two months.
University of California at San Diego economics professor James D. Hamilton notes that the weakness in growth makes it unlikely for the U.S. to return to 3% annualized GDP growth anytime soon, despite economists’ expectations that cheap oil would spur demand. In fact, in the first quarter of 2016 oil saw its lowest inflation-adjusted prices in history, yet demand refused to pick up.
"U.S. growth is certainly facing some significant headwinds, and lower oil prices do not appear to have helped. Nevertheless, the employment numbers have been showing strong momentum, and housing can make further positive contributions in the coming two years. Maybe not enough to get us back to 3%. But we can still hope to get back to 2%,” Hamilton wrote on his blog, Econbrowser.
The Econbrowser Recession Indicator Index also rose to 15.7%, indicating a greater chance of a recession in the near term due to the weak growth.
Additionally, the Kansas City Federal Reserve noted a modest decline in manufacturing activity, leading many analysts to dismiss the possibility of an interest rate hike in May or June.
Also dragging down economic hopes was an increase in weekly initial unemployment claims, which surprisingly rose to 257,000. Even with the increase, however, the four-week average of 256,000 is the lowest level since 1973, although critics note this is partly because the labor force participation rate has dropped to 1970s levels due to discouraged younger workers. 
Courtesy of Economy Watch (Archive Here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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