Slower US economy sets the stage for Fed

America's economic expansion faltered badly in the first quarter, with gross domestic product rising at a sluggish 0.2 per cent annual pace amid a surging dollar and weather-related disruptions that could influence policy makers' timing on lifting interest rates.

The growth figure was a fraction of the 1 per cent annual rate of expansion predicted by Wall Street economists, and marked a sharp slowdown from the 2.2 per cent pace recorded for the fourth quarter of 2014 and the 5 per cent expansion in the third.

The Department of Commerce numbers came as Federal Reserve policy makers met to discuss plans to raise short-term interest rates. Officials have taken a more cautious tack in recent weeks amid signs of soggier growth and weaker corporate hiring in March. The dollar fell to a near two-month low after the GDP figures were released.

Dennis Lockhart, the president of the Atlanta Fed, who votes on rates this year, told the FT earlier this month that he was leaning to a "later lift-off date" - pointing to September instead of June.

Growing market disappointment in the US economy sent the euro soaring higher against the dollar, with the common currency rising 1.75 per cent to its highest level for eight weeks and breaking through the key $1.10 mark.

Dollar strength has been accelerating since the start of the year and, coupled with the European Central Bank's bond-buying programme, has steadily weakened the euro, in turn helping to drive European exporters.

But the marked currency switch is now weighing on European equities. Germany's Dax index fell by 3.2 per cent on Wednesday, and in London the FTSE 100 index was down 1.2 per cent.

Policy makers parsing the US GDP numbers will need to disentangle fleeting influences such as freezing winter weather and a port strike from longer-lasting factors, including the dollar surge, which is bearing down on exports and on consumer price growth, as well as the deep drop in oil-related investment.

A key question is whether the numbers are set to repeat the pattern seen last year, in which the first quarter saw a 2.1 per cent slide in GDP, only to be followed by stellar growth numbers in the second and third quarters.

Chris Williamson, chief economist at Markit, said Fed officials would now need to sit tight and wait for a clear picture on the economy's performance in the second quarter. That leaves "September as the first realistic possibility of rates being hiked, providing of course that the economy bounces back in the coming months," he argued.

The Fed in March put June on the table as the first possible month for a rate increase, removing its pledges to be "patient" about rate increases, but chairwoman Janet Yellen insists this does not mean the central bank is impatient to tighten policy.

Government statisticians listed a series of factors for the weak first-quarter numbers, including the dollar strengthening, delays to imports and exports because of the West Coast port strike, the decline in energy prices, and severe winter weather.

Weak net export figures lopped 1.25 percentage points from the growth rate in the period, reflecting the impact of dollar appreciation.

The oil price drop took its toll on investment in drilling by energy companies, overshadowing the benefits of the fall in prices for consumer finances. Investment in non-residential structures subtracted three-quarters of a point from output, due mainly to a 48.7 per cent decline in investment by oil and gas drillers.

Household expenditure rose 1.9 per cent in the first quarter - sharply slower than the 4.4 per cent pace in the fourth. The White House Council of Economic Advisers said in a note that households appeared to have put "most" of the oil-price savings in the bank - pointing to a 0.6 percentage point increase in the personal saving rate over the past four quarters.

Two jobs reports are scheduled for release before the Fed meets for its June meeting, which will help policy makers gauge how serious the current setback is to the US recovery.

Gad Levanon, an economist at the Conference Board think-tank, said: "While the reported 0.2 per cent partly reflects temporary factors, such as port closings and bad weather, and underestimates the current trend in the US economy, we do think that economic growth is weakening. The downward pressure on profits, the large drop in oil-related investment and the strong dollar are holding back the US economy."

Additional reporting by Roger Blitz in London

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