• GDP growth paused in the March quarter, but indicators point to a bounce back in the June quarter.
• The labour market continues to improve highlighted by a large fall in the unemployment rate in April. Other labour market indicators are also improving but more slowly, and wages growth remains muted.
• QE tapering to continue through 2014 with the asset purchase program to end in the December quarter. No change in the fed funds rate is expected until around mid-2015. The main risk is that when tightening starts it will be quicker than expected.

Growth in the U.S. economy paused in early 2014. According to the advance estimate for the March quarter, GDP growth was only 0.1% qoq (annualised rate). Data released since the advance estimate suggests that, when the second estimate is released later this month, activity is likely to be revised downwards and show negative growth.

Several factors appear to be behind the sharp slowdown. These include a correction to strong growth in the second half of the year as inventory accumulation slowed and the strong December quarter net export performance was unwound. Equipment investment also declined after spiking towards the end of 2013. A harsh winter also likely had an impact although it is difficult to quantify.

Private consumption growth did hold up in the March quarter. However, most categories of consumption were weak and the strong overall result was largely due to high rates of power (due to the cold weather) and health care (due to the impact of changes in health care laws) consumption growth. In contrast, business fixed investment declined and residential investment went backwards for the second consecutive quarter. More details on the advance
GDP estimate can be found in our report on the release.

A deceleration in growth was not a surprise as the harsh winter and slower inventory accumulation were expected to take a toll. While the extent of the slowdown was a surprise, the bigger issue is whether the data over the course the quarter and into the June quarter are consistent with the view that it is a one-off result and that the broader recovery is on track.

At this stage, the indicators are consistent with this view and point to a bounce back in economic growth in the current (June) quarter. Partial indicators of consumption, business investment, exports and employment have strengthened over the recent months, with housing the main area still showing weakness..

For further analysis download the full report.
US Economic Update – May 2014 (PDF, 237KB)