Canadians had better hope the U.S. economy isn't really as bad as it looked in the first quarter of 2015. Because if it is, Canada's dreams of economic salvation courtesy of its southern trading partner may soon face a rude awakening.
Everyone expected U.S. gross domestic product figures to come in tepid for the first quarter, after another horrid winter and a series of weak indicators had signalled sluggish growth. But they hadn't expected that the supposedly booming U.S. recovery had stalled almost entirely: Just 0.2-per-cent GDP growth on an annualized basis in the three months ended March 31, according to the Commerce Department's first estimate for the quarter.
It should be noted that the figure, while distressingly weak, is almost certainly wrong. The Commerce Department issues three estimates of GDP growth each quarter, and its revisions from its first (or "advanced") estimate are routinely substantial. On average, the advance estimate is a full 1.2 percentage points different from the final estimate (which won't be published until late June).
Nevertheless, it's clear that the U.S. economy, supposedly the big engine that this year was going to power a global recovery – and, especially, a Canadian resurgence – sputtered in the first quarter. We can quibble about the accuracy of the bottom-line GDP number, but the details don't lie.
U.S. retail sales fell for the quarter. So did industrial production. Exports slumped badly. So did business investment. Job growth in March slowed to less than half the average for the prior 12 months.
The nasty winter will be blamed for much of the slowdown – and not without compelling precedent. Last year, U.S. GDP contracted 2.1 per cent annualized in the first quarter, amid unusually cold and snowy weather in many key regions of the country. But the pent-up demand from the winter was unleashed with a vengeance once warmer weather arrived: GDP grew at annual rates of nearly 5 per cent over the next two quarters.
Based on nationwide temperature statistics, this year's U.S. winter was just as cold as last year's. So if winter merely delayed the U.S. economy and primed it for a rebound a year ago, it may well repeat the trick this year. You could argue that with a winter like that, the fact that the U.S. economy managed any growth at all is evidence of its underlying strength.
That would be the optimistic spin – perhaps the one that Bank of Canada Governor Stephen Poloz, who has sounded remarkably upbeat in the face of unimpressive economic data lately, will embrace. His expectation is that strong demand from a robust U.S. economic expansion will fuel Canadian export growth that will soon overwhelm the oil-shock funk that has hung over Canada's economy in the first few months of this year.
But the details of the U.S. first-quarter GDP estimate place a couple of big question marks over this positive scenario.
First, what little growth the U.S. economy appears to have managed in the first quarter was top-heavy with inventory build-ups. Without inventory growth, first-quarter GDP would have contracted by 0.5 per cent annualized. All that inventory suggests that even if/when demand snaps back, companies are well stocked to meet it without ramping up their production or expanding capacity – or order a whole raft of Canadian goods and raw materials.
The second, and bigger, issue is slumping U.S. business investment in the quarter. Mr. Poloz has pointed to several key Canadian non-energy export sectors that have been leading the export recovery – machinery and equipment, building materials, metals – as critical evidence of the strengthening fundamentals in the U.S. recovery, as they suggest capacity expansion among U.S. businesses, a vital foundation for economic growth. Suddenly, that storyline looks compromised by the investment retreat in the first quarter.
A big part of that investment downturn reflects a plunge in spending in the energy sector – evidence that the U.S. economy hasn't cashed in on the oil shock the way many observers had anticipated. Just as Canada has experienced, the oil shock in the United States has had a rapid downside, in dramatic and immediate spending cuts at energy-sector companies. The anticipated upside, in increased disposable income for consumers due to their savings on fuel costs that should fuel increased consumption, is a more gradual and less certain process. Just because you put money in a consumer's pocket doesn't mean he or she will spend it. It hasn't happened yet.
The Canadian dollar was a beneficiary of the weak GDP numbers Wednesday, as the news suggested that an early interest-rate hike from the U.S. Federal Reserve looks less likely in view of the first-quarter economic setback – sending investors out of the U.S. dollar, though not necessarily toward the Canadian currency. But make no mistake, this is not good news for Canada. Without a U.S. resurgence, the foundation on which this year's Canadian economic prospects are built crumbles pretty quickly.
For now, then, let's blame the weather. And cross our fingers.