US economy struggles at start of election year

WASHINGTON – It was not a great start for the U.S. economy.

With consumers and businesses turning cautious, the U.S. struggled to grow in the first three months of a presidential election year that is shining the spotlight on the economy’s fitful recovery.

Gross domestic product, the broadest measure of economic health, expanded at a paltry annual rate of 0.5 per cent in the January-March quarter, the Commerce Department reported Thursday. That is slower than the fourth quarter’s 1.4 per cent growth rate and marks the weakest performance in two years.

The good news is that American employers are still adding plenty of jobs, which is expected in the months ahead to fuel an economy that’s still outshining much of the world. But if the global slump deepens, or if jobs lose momentum, it could turn Election Day into a pivotal referendum on the economy.

The poor start to the year did not escape notice among Republicans hoping capture the White House in November.

“Today’s report showing the weakest period of economic growth in two years is the latest sign the Obama economy isn’t working,” said Republican National Committee Chairman Reince Priebus. “Hillary Clinton wants to double down on his failed agenda.”

Democrats said GDP should strengthen going forward, with the country continuing to enjoy the longest stretch of private sector job growth on record. The U.S. has added 14.4 million jobs over the last 73 months.

Jason Furman, chairman of Obama’s Council of Economic Advisors, said the GDP report showed “there’s more work to do and the president will continue to call on Congress to support policies that will boost our long-run growth and living standards.”

Private economists said that given the severity of the 2007-2009 recession, the debate over the economy is certain to take centre stage during campaign season. Democrats will point to a jobless rate at 5 per cent — considered close to full employment — and expectations that job growth will continue at a solid monthly pace of at least 200,000 in the months leading up to the election.

But Republicans note that annual GDP growth in this recovery has averaged just above 2 per cent. That is the slowest pace in the post-war period. Many middle class families are struggling, especially those who lost jobs in the downturn and have had to take on work at lower salaries.

“How all of this will play out in an election is a big question,” said Nariman Behravesh, chief economist at IHS Global Insight. “Why is it that voters are feeling so blue when we have an economy that is close to full employment? Part of the problem is a divide between people with college degrees who are doing fairly well and people with high school degrees who are not doing so well.”

The 0.5 per cent GDP advance in the first quarter was the weakest showing since GDP contracted by 0.9 per cent in the first three months of 2014. It’s a familiar pattern in recent years — a weak first quarter followed by a much stronger second quarter figure.

Many economists are forecasting growth will revive in the current April-June quarter to around 2 per cent, and strengthen further in the second half of the year.

Part of the first-quarter weakness stems from the turbulence in the stock market at the beginning of the year, which was triggered by worries that China was slowing more than expected.

The market has since recovered all of its early-year losses, China’s slowdown now seems less worrisome and oil prices have stabilized and started to rebound. In addition, the U.S. dollar, whose strength had hurt American exporters, has stopped rising and retreated a bit.

Those developments and continued job growth will help bolster the economy in the current quarter and beyond, Behravesh and other analysts said.

But Brian Bethune, an economics professor at Tufts University in Boston, said the rebound could still be derailed if there are not “more positive growth trends overseas.”

Consumer spending, which accounts for 70 per cent of economic activity, grew at a 1.9 per cent rate in the first quarter. That’s down from 2.4 per cent in the fourth quarter and is the weakest showing in a year.

Business investment dropped at a 5.9 per cent rate, the biggest quarterly plunge since the depths of the recession in 2009. The decline was led by a record 86 per cent plunge in the category that covers oil and gas exploration. U.S. energy companies have cut back sharply in response to falling global oil prices.

The higher deficit subtracted 0.3 percentage point from growth in the first quarter. A further slowdown in business spending to restock their store shelves also hurt growth.

The Federal Reserve on Wednesday took note of economic weak spots and decided for the third straight meeting to keep its key policy rate unchanged in a range of 0.25 per cent to 0.5 per cent. Many analysts don’t believe there will be a second rate hike until perhaps September after more signs of growth.