US: economy stalled in Q1 but don’t extrapolate

The US economy unexpectedly stalled in Q1 as the bad weather exacted a toll on economic activity. The only positive thing to say is that the recent rebound in economic data suggests that we will see much stronger growth in remained of 2014. For now, we are forecasting 3.5% growth in Q2.

Overall, today’s data suggest that the Fed will stick to its ultra-dovish forward guidance for still some time to come. However, we have little doubt that the Fed will trim its monthly assets purchases by another USD 10bn to USD 45bn at the meeting later today.

Real GDP growth slowed to a 0.1% annual rate in Q1, the weakest since Q4 2012 and significantly weaker than the 2.6% pace in Q4 2012 and the 1.2% consensus forecast (Nordea: 1.5%). Consumer spending, partly reflecting higher heating bills, rose a better-than expected 3%, but on the weak side was a 2.1% decline in fixed business investment, a 5.7% drop in residential spending, a 7.6% decline in exports and a significant slowdown in inventory building, subtracting 0.6% point from GDP. Real domestic final sales (=GDP less change in inventories and net exports) rose 1.5%, down from 1.7% in Q4.

Inflation remains tame. Core CPE prices rose at a 1.3% annual rate in Q1, unchanged from Q4. The wage component in the employment cost index, was up just 1.6% y/y in Q1, down from 1.9% in Q4 and much weaker than our 1.9% forecast.