First Quarter GDP – A Sign of Storms Ahead or a Seasonal Fog?

First Quarter GDP – A Sign of Storms Ahead or a Seasonal Fog?

“What good is the warmth of summer, without the cold of winter to give it sweetness?” – John Steinbeck
Living in the Bay Area we can easily forget just how harsh winter can be.  However, when economic trends began to suggest the U.S. economy was destined for another round of negative first quarter GDP, it served as a ”cold” reminder that weather can be severe enough to impact our country’s economic engine. For many investors, this news was an unwelcome moment of déjà vu, as first quarter GDP has been negative three times in the last five years.  The frequency of these negative GDP quarters begs the question: has this really all been driven by poor weather, or is it a sign that the economic recovery is treading on thin ice? While weather has certainly been a factor over the last two years, several other elements such as the recent West Coast port labor dispute and the strengthening U.S. dollar have contributed to subpar outcomes. Nevertheless, we anticipate many, if not all, of these pressures will abate as we move throughout the year and perhaps “sweeten” trends to come in subsequent quarters.
Weather dominated the headlines with terms such as Snowmageddon and Polar Vortex swirling through the financial press as business trends came to a halt in many highly populated areas of the country.  Employment growth, housing and retail sales were directly impacted.  Some economists estimate weather negatively impacted the first quarters of 2014 and 2015 by as much as 1.4% and 0.5%, respectively.   Right on cue, however, as the weather warmed up the economy followed suit and returned back to trend line growth.  But there is more to these results then meet the eye.  Winter weather has become more severe in recent years and several highly respected organizations, including the San Francisco Federal Reserve, have suggested that seasonal adjustments to GDP may be flawed.  In what has been termed residual seasonality, the first quarter may be shouldering more impact from seasonality than it should.  The Bureau of Economic Analysis, the agency that calculates GDP, will review seasonal adjustments and issue revisions later this summer.  We anticipate this will result in an upward revision to first quarter GDP results for the last couple of years.
Oddly, and perhaps the least discussed but potentially largest pressure to recent GDP growth, was the West Coast port labor dispute.  Labor negotiations dragged on for nine months, and by the first quarter of this year, volumes had declined significantly as a result of work slowdowns and partial shutdowns.  During the months of January and February volumes at the Ports of Los Angeles, Long Beach and Oakland were down double digits year over year.  While currency was likely a factor, data following the resolution of the labor dispute revealed a significant pick up in export activity.  This suggests underlying activity may have been healthier than investors had assumed.
First quarter GDP growth has served as a frequent reminder that the economic recovery in the U.S. has had its fair share of dense fog and stormy weather and, at times, it has been hard to decipher its true underlying health. Nevertheless, through our analysis of economic and business trends, we feel the underlying fundamentals of the economy are strong.  We anticipate the U.S. will continue to lead the global economic recovery among developed countries and that first quarter weakness will likely serve to sweeten trends throughout the remainder of the year.

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