A strong dollar that made U.S. goods less competitive in foreign markets and a now-resolved labor dispute at normally busy West Coast ports also slammed growth, the government said.
While there are signs the economy is pulling out of the soft patch, the lack of a vigorous growth rebound has convinced investors the Federal Reserve will wait until late this year to start hiking interest rates.
The recovery is the slowest on record and the economy has yet to experience annual growth in excess of 2.5 percent.
“The U.S. economy has yet to demonstrate the self-sustaining resilience that the Fed wants to see before raising interest rates,” said Diane Swonk, chief economist at Mesirow Financial in Chicago. “A June liftoff is now off the table. Our forecast for a September move holds but even that has become tenuous.”
Fed officials at the end of their two-day policy meeting on Wednesday acknowledged the softer growth, but shrugged it off as “in part reflecting transitory factors.”
Economists had expected the economy to expand at a 1 percent rate. The sharp growth slowdown is probably not a true reflection of the economy’s health, given the role of temporary factors such as the weather and the ports dispute.
“The extent and depth of the weakness in today’s GDP report, sets the U.S. up for another disappointing though somewhat better GDP report in the second quarter. We are not ready to throw in the towel for the year,” said Scott Anderson, chief economist at Bank of the West in San Francisco.
Still, “It’s hard to sugar-coat today’s number,” said Michael Feroli, an economist at JPMorgan Chase. “It was disappointingly soft.”
The economy has had a jerky recovery from the 2007-2009 financial crisis, with the first quarter marking only the latest setback. The government did not quantify the impact of the weather, the strong dollar, lower energy prices and the ports disruptions on growth last quarter.
Economists, however, estimate unusually cold weather in February chopped off as much as half a percentage point, with the port disruptions shaving off a further 0.3 percentage point.
The weather impact was evident in weakness in consumer spending, which accounts for more than two-thirds of U.S. economic activity. Its 1.9 percent growth rate was the slowest in a year and followed a brisk 4.4 percent pace in the fourth quarter.
The sharp moderation in consumer spending came even though households enjoyed huge savings from a big drop in gasoline prices. Consumers boosted their savings to $727.8 billion from $603.4 billion in the fourth quarter, which should provide a tailwind for future consumer spending.
Construction also took a hit, while lower energy prices, which have cut into domestic oil production, undermined business investment.
Economists believe the bulk of the spending cuts were front-loaded into the first quarter, and they expect they will present less of a drag on growth in the April-June quarter.
“The weakness in business investment in response to the oil price shock may be transitory, but we continue to have doubts that the next leg of faster investment will kick in if GDP growth, especially consumer demand, does not improve significantly,” said Dana Peterson, an economist at Citigroup in New York.
The dollar, which gained 4.5 percent against the currencies of the United States’ main trade partners in the first quarter, weighed on trade, as did the West Coast ports dispute. Trade subtracted 1.25 percentage points from first-quarter growth.
The dollar is expected to remain strong, given that the Fed will likely start raising short-term interest rates later this year. That makes it more profitable for foreigners to invest in the U.S., boosting demand for the dollar. Ethan Harris, global economist at Bank of America Merrill Lynch, forecasts the stronger dollar will cut growth this year by 0.5 percentage points.
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