Don’t count out the U.S economy just yet.
While it’s true that economic performance in the U.S. broadly disappointed in the first quarter — with the exception of jobs data — temporary factors such as colder than seasonally anticipated weather, as well as the West Coast ports shutdown and the collapse in oil-related investments presented one-off events that temporarily depressed output in the quarter.
But this pattern of weak first-quarter data has been the case for most of the past five years, as shown below. Average gross domestic product (GDP) has come in at just 0.6% in the first quarter from 2010 to 2014, substantially lower than in other quarters. (2015 first-quarter GDP will be unveiled on April 29.)
So, lower bond yields in March and April have come in an environment of steadily disappointing economic data. And, in that environment, the Federal Reserve’s more dovish communication furthered expectations for a more benign interest rate environment.
However, investors should be careful not to read too much into these latest developments.
Despite seasonal adjustments, the U.S. economy has still exhibited surprisingly strong seasonality since the financial crisis. The chart plots the Citi U.S. Economic Surprise Index — an index that reacts positively when economic data surprise above economist forecasts and negatively when data surprise below.
There’s a distinct and sharp downward trend at the beginning of almost every year since 2011, only to hit a trough in June and accelerate to a peak by the end of the year. In addition to economic surprises (relative to forecasts), realized first-quarter GDP has noticeably underperformed other quarters since the financial crisis, for various reasons.
The most recent evidence of the first quarter seasonal weakness came in the form of disappointing March retail sales numbers, which not only missed consensus estimates but also included downward revisions to prior months’ readings.
However, the chart also highlights the trend for second-half recoveries in growth. Notwithstanding these seasonal characteristics, the ongoing improvements in labor markets fueling rising incomes, falling oil prices boosting disposable income growth globally, and the rising confidence of business for capital expenditures and investments all point to a recovery in growth in the second half.
As the first quarter data fade in the rear view mirror, we still continue to expect eventual better economic numbers to meet the conditions the Fed laid out for raising rates: continued improvements in the labor market along with reasonable confidence of inflation returning to target over the “medium term”.
Jeffrey Rosenberg, Managing Director, is BlackRock’s Chief Investment Strategist for Fixed Income, and a regular contributor to The Blog. You can find more of his posts here.