Here's why the US economy usually stinks at the beginning of the year

Once again, the first three months of the year were a dud for the US economy. 

Gross domestic product — the headline metric on the economy’s output — increased by just 0.7% in the first quarter, according to the Department of Commerce. Growth hasn’t been that sluggish since the first quarter of 2014 when it actually shrank.

But every first quarter report in the post-financial-crisis economic recovery has been weak. In fact, GDP has averaged a 0.6% annualized rate since 2013, despite trend growth rate of 2% to 2.5% over that same period, according to Jim Baird, the chief investment officer at Plante Moran Financial Advisors. 

That’s because the Commerce Department has not yet fully resolved how to deal with residual seasonality, or how to adjust for spikes and plunges that distort what’s really going on in the economy. It could be one reason even Federal Reserve Chair Janet Yellen recently dismissed GDP as “a pretty noisy indicator.”

Here’s how seasonality works: we know that consumers tend to spend more around Christmas. But it’s not because their incomes increase leading up to those holidays. So the Commerce Department has make adjustments to reflect the fact that people are spending more just because they want to give gifts — instead of assuming that something underpinning the economy has suddenly changed.

This residual seasonality means it would be a mistake to reach a conclusion about what the first-quarter report means for the rest of the year. 

“The underlying economy, I think, is significantly better than this report suggests,” said Dan North, the chief economist at Euler Hermes North America.   

Personal consumption rose 0.3%, the weakest pace since December 2009, not long after the economy escaped recession. The big drag here related to spending on cars, which dropped in the first three months of the year. Also, retail sales fell in February and March. 

“The consumer is expressing excitement and exuberance about new possibilities, a new administration, and new policies, but still hesitant because those policies clearly aren’t going to go in place for a while,” North said. Economists expect that the labour market and income growth would support a rebound in spending in the coming quarters, although that’s not guaranteed. 

Meanwhile, business investment got a jolt from a record increase in spending on oil and gas exploration.



NOW WATCH: The disturbing reason some people turn red when they drink alcohol

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.