By Jon Hilsenrath And Jeffrey Sparshott
The economy's sharp first-quarter slowdown is giving Federal
Reserve officials pause.
The nation's central bank pointed to cooling economic activity
and reduced job-market gains in its policy statement Wednesday,
underscoring uncertainty among officials about when the economy
will rebound and clouding the timing of when they will begin to
raise interest rates. Earlier in 2015, many officials thought a
midyear rate increase was possible. Now it looks highly
unlikely.
"Economic growth slowed during the winter months, in part
reflecting transitory factors," the Fed said. "The pace of job
gains moderated, and the unemployment rate remained steady."
The Fed's two-day policy meeting concluded a few hours after the
Commerce Department reported that gross domestic product, the
broadest measure of economic output, grew at a 0.2% annual rate in
the first quarter. That followed advances of 2.2% in the fourth
quarter and 5% in the third.
Fed officials sought to look beyond another winter economic
disappointment by noting that household incomes and confidence were
rising and growth was expected to return to a modest pace.
Still, they want firm evidence the economy is stronger before
they start lifting their benchmark short-term interest rate, which
has been near zero since December 2008.
Bad weather, cheaper oil, disruptions at West Coast ports and
the stronger dollar appear to be at least partly behind the
downturn. In the first three months of the year, consumers showed
signs of caution about spending, businesses slashed
investment--especially in the energy sector--and exports tumbled,
marking a return to uneven growth that has been a hallmark of the
nearly six-year economic expansion.
The port shutdowns and cold winter are over, so many economists
expect growth to pick up. But cautious consumers, an investment
bust in oil-producing states and a strong dollar's hit to exports
could be longer-lasting impediments to a big rebound.
A stronger dollar has made domestically produced goods more
expensive overseas and foreign products cheaper inside the U.S. A
widening trade gap has subtracted from economic output in four of
the past five quarters, according to the Commerce Department.
"It's hard to sugarcoat today's number--it was disappointingly
soft," Michael Feroli, chief U.S. economist at J.P. Morgan Chase,
said of first-quarter growth in GDP.
Wednesday's economic news has become an all-too-familiar
pattern. The economy seems to repeatedly stumble in the dreary
winter months. Statistical procedures used by government
number-crunchers are meant to smooth out seasonal swings in the
economy, such as slowdowns in home building during winter months or
hiring and layoffs of retail workers around Christmas.
Still, the sluggishness in winter growth readings persists. Last
year, economists pinned much of the blame for a bad first
quarter--GDP fell at a 2.1% annual rate--on unusually harsh
weather. This year, the Northeast was again hit with blizzards that
may have briefly muted consumer spending and business activity.
Since 2010, first-quarter GDP growth has averaged 0.6% while all
other quarters 2.9%. That stop-and-start pattern has forced Fed
officials to regularly second-guess their own economic
forecasts.
Fed officials now need time to ensure their expectation of a
rebound proves correct.
Officials in March opened the door to rate increases later this
year by removing from the policy statement assurances that they
would stay patient on timing. But they said they won't move until
they become reasonably confident that inflation is rising toward
the Fed's 2% objective and as long as the job market continues to
improve.
The fact that the job market didn't improve since the last
meeting means Fed officials are in no hurry to move. Many analysts
are now looking toward a move in September or later in the year,
rather than June.
"You would have to see a pretty significant surprise on the
upside [for the economy] to put June back on the table," said Tim
Hopper, chief economist at TIAA-CREF, the retirement fund
manager.
While the Fed looks for evidence the economy has regained its
footing, the oil patch is hurting.
Wilco Machine & Fab Inc., a Marlow, Okla., maker of storage
tanks, portable silos, tools and other specialty equipment used
largely in the oil and gas industry, expects its sales to drop by
50% this year and also has cut its employment in half at its
plant.
"I see this as a very tough and challenging year with many hard
decisions to make," said company President Brad Boles. "We will get
through this downturn, but not without losing many good employees
and suppliers."
Mr. Boles said oil prices will have to rise back to about $75 a
barrel before customers to start ordering new equipment. Crude-oil
prices have come off of recent lows but on Wednesday remained below
$60 a barrel.
Across the nation, nonresidential fixed investment--which
reflects spending on software, research and development, equipment
and structures--fell at a 3.4% rate in the first quarter, compared
with a 4.7% increase in the fourth quarter. Business investment in
structures dropped at a 23.1% rate, led by a 48.7% contraction for
mining sector spending on shafts and wells, Commerce said.
Much of what businesses produced ended up in stockpiles. Rising
inventories contributed 0.74 percentage point to GDP in the first
quarter. In the second quarter, producers are more likely to allow
inventories to run down rather than building them up even more,
which would be a new drag on growth.
Still, the outlook has some clearer bright spots. The finances
of American households are improving, thanks to job gains and the
benefits of cheaper gas. After-tax incomes adjusted for inflation
were up at an annual rate of 6.2% from the prior quarter, the
biggest gain since late 2012.
The Fed pointed to gains in household income as evidence of
underlying economic vigor.
Still, the GDP report showed that consumer spending grew at a
1.9% pace in the first quarter, down from 4.4% in the fourth
quarter. Rather than using savings from cheaper gasoline to buy
more goods and services, Americans have been setting money aside
for a rainy day. The personal saving rate at 5.5% in the first
quarter was the highest since 2012. The figure was 4.6% in the
fourth quarter. Money not spent now might be spent later.
Some companies have been caught in multiple economic
crosscurrents.
Sales at C.R. Onsrud Inc. slowed in the first quarter. "We
weren't losing any business, but it seemed like everyone was
delaying projects," said Andy Turner, regional sales manager at the
Troutman, N.C., maker of precision routers and other
computer-assisted machines.
Clients in the Northeast weren't working because of severe
weather and told Mr. Turner to hold off on visits. And some
furniture and cabinet companies, which use Onsrud's machines to cut
wood, were slow to get raw materials while they piled up at West
Coast ports. "They didn't want to buy machines because they didn't
have anything to put on them," he said.
But so far April has been the busiest month of the year and Mr.
Turner expects 2015 sales to grow slightly from last year, when
revenues hit about $36 million.
One obstacle has been a stronger dollar. Exports account for
only about 5% of sales at Onsrud, which makes machines that sell
for around $200,000 each. But the company competes against European
and Asian manufacturers with similar products.
"The reality is that in some cases we have to work off of a
slimmer [profit] margin to get the same business that we would have
been able to get when the dollar was weaker," Mr. Turner said.
"It's hurting us here in the U.S. All of the machines that are
being imported now basically got a big price cut."
Write to Jeffrey Sparshott at jeffrey.sparshott@wsj.com and Jon
Hilsenrath at jon.hilsenrath@wsj.com