The US economy put in a disappointing performance in the first quarter of 2015, growing just 0.2% in annualised terms. The result was well below already modest expectations for growth of 1.1%.
Immediately following the GDP release a familiar question began to permeate across markets: Will the economy rebound as seen in previous years or, due to a significantly higher US dollar and some other factors, is it a sign of things to come?
Goldman Sachs, reflecting a similar belief to Soc Gen expressed last week, believes the economy will rebound strongly over the remainder of 2015.
Here’s three reasons why Jan Hatzius, Goldman’s chief economist, believes we should all “keep the faith” in the US economic recovery (emphasis added):
First, the Q1 GDP weakness is at odds with other data as summarized by our current activity indicator (CAI), which showed 2.8% growth on a quarter-on-quarter annualized basis. The
2.6-point gap between the two measures is the biggest in the 1997- 2015 history of the CAI. Historically, large gaps of 1.5 points or more have on average been unwound entirely by a subsequent acceleration in GDP growth as opposed to a slowdown in the CAI.
Second, adverse weather was likely an important drag on growth last quarter. We estimate that cold temperatures and ample snowfall shaved 1¼ percentage points from Q1 growth. If our estimate is correct, and if the impact unwinds in Q2, the weather swing in itself should result in a GDP acceleration of about 2½ percentage points.
Third, Q1 has long been a funny quarter. Since 2010, GDP growth has averaged just 0.3% in Q1, compared with 2.9% in the remaining three quarters of the year. Some of this is due to the adverse weather in 2014 and 2015, but there is also evidence going back to the early 1990s that residual seasonality in several components of GDP has tended to weigh on Q1.
The first point Hatzius raises, the relationship between GDP and Goldman’s current activity indicator, makes a compelling case that economic growth could rebound sharply in the coming quarters.
Here’t a chart that that shows the relationship between the two:
Given the historic relationship – of the eight occasions GDP has printed 1.5ppts or more below Goldman’s CAI figure, growth in the subsequent quarter has rebounded by 2.5% on average since 1997 – it suggests the US economy will once again accelerate starting in the second quarter of the year.
Indeed, Hatzius suggests the “numbers are very consistent with our forecast that GDP growth will accelerate to 2.9% in Q2”.
With a midyear rate hike from the Fed still a possibility, such a rebound in growth – for a third consecutive year – is likely to bring with it significant implications for the outlook for monetary policy.