Harsh winter weather and sluggish global demand hurt the U.S. economy's momentum, as real GDP contracted sharply by 2.9% in the first quarter. Business and residential investment stalled, inventories were drawn down, exports contracted, and personal consumption posted weak growth even with outsized winter heating/utility bills. The contraction, however, is expected to be temporary, as an array of forces – the housing recovery, energy renaissance, and accommodative credit markets – will support stronger growth in the second-half of the year.
The largest negative contribution in first quarter GDP came from a drawdown in private inventories, which subtracted 1.7 percentage points from top-line growth, while a ballooned trade deficit shaved off an additional 1.5 percentage points from growth. Looking forward, there should a modest "payback" effect from the weak first quarter, yet not as much as previously expected. Surveys of businesses' new orders are encouraging, suggesting that business equipment spending will bounce back, and as exports pick up, the trade deficit should narrow. Consumer spending, however, which accounts for over two-thirds of the U.S. economy, grew at a weak pace in April and May, indicating that Q2 GDP will not have as robust a rebound as originally thought. Even with positive underlying fundamentals supporting above potential growth through the rest of the year, it will be mathematically difficult for the US economy to grow above 2.0% in 2014 due to the weak first quarter.
Our U.S. economic forecast reflects a "tale of two halves" with a very weak start to the year followed by 3% growth in the second half. Overall, we expect the U.S. economy to grow 1.5% in 2014.
Growth in equipment and software investment decelerated from expanding at an 8.9% annualized rate in Q4 2013 to contracting 1.8% in Q1. Looking ahead, we expect a rebound in Q2, modest sector growth for the coming year, with an overall forecast of 2.6% growth in 2014.
- Agriculture Machinery investment will likely see slow growth, and potentially a contraction, through the rest of 2014, as both farm yields and commodity prices remain subdued.
- Construction Machinery investment will continue to experience strong growth, and the year-over-year growth figures will begin to trend positive as multiple quarters of expansion take hold amidst the housing recovery.
- Materials Handling Equipment investment will experience stronger growth over the next 3 to 6 months.
- All Other Industrial Equipment investment will likely see moderate growth over the next 3 to 6 months as the "re-shoring" of manufacturing continues to be a dominant economic story in 2014.
- Medical Equipment investment will grow, but begin to level off near the end of the year.
- Mining & Oilfield Machinery will likely slow after a relatively strong Q1.
- Aircraft investment will likely experience about long-term average growth for the year.
- Ships & Boats investment will likely rebound to an above-average pace through the end of this year.
- Railroad Equipment investment will improve from its recent contraction towards modest growth.
- Investment in Trucks will exhibit high-single digit growth over the next 3 to 6 months as economic activity improves and competitive diesel prices keep trucking transport competitive.
- Computers investment will remain muted in the short-term after strong replacement demand over the past few quarters.
- Software investment will be moderate in the next 3 to 6 months as companies continue to make investments in software and cloud technologies.
Credit market conditions remain highly accommodative, and the Federal Reserve will continue to implement a two-pronged policy agenda in 2014. QE3 is all but certain to wind down by year's end. As such, there has already been a shift in the monetary policy debate as to the appropriate time to raise short term interest rates, along with the added question mark of how and when the Fed will shrink its massive balance sheet. Divisions between the "New Hawks" and the "Doves" are likely to increase as decisions on policy tightening and turnover of members come into the forefront. Looking forward to the rest of 2014, policy uncertainty has been less of a factor for most businesses, which has helped reduce market volatility. Overall, equipment investment continues to be driven predominantly by replacement demand rather than expansions.