The US economy contracted in the first quarter for the first time in three years as it buckled under the weight of a severe winter, but there are signs activity has since rebounded.
The Commerce Department today slashed its estimate of gross domestic product to show the economy shrank at a 1.0 per cent annual rate. The worst performance since the first quarter of 2011 reflected a far slower pace of inventory accumulation and a bigger than previously estimated trade deficit.
Both are temporary factors which should fade and unleash a surge in growth this quarter. "The race isn't over yet for the economy. We are still expecting a strong finish to the year. Inventory levels will rebuild, pushing GDP to nearly 4 per cent in the second quarter," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
GDP was initially estimated to have grown at a 0.1 per cent rate. It is not unusual for the government to make sharp revisions to GDP numbers as it does not have complete data when it makes its initial estimates. The decline also reflected a plunge in business spending on nonresidential structures.
The economy grew at a 2.6 per cent pace in the fourth quarter. Investors shrugged off the report. US stocks opened higher, with the Standard & Poor’s 500 index hitting a record high. Prices for US Treasury debt were up, while the dollar was little changed against a basket of currencies.
Economists estimate severe weather could have chopped off as much as 1.5 percentage points from GDP growth. The government, however, gave no details on the impact of the weather.
Other data today from the Labor Department showed first-time applications for state unemployment benefits declined 27,000 to a seasonally adjusted 300,000 last week.
The four-week moving average for new claims, a better measure of underlying labor market conditions, hit its lowest level since August 2007. Separately, pending contracts to buy previously owned homes rose in April for a second month, a positive sign for the troubled housing market.
The reports added to data on manufacturing and hiring that have buoyed hopes of a strong rebound in growth in the second quarter. Businesses accumulated $49.0 billion worth of inventories in the first three months of the year, far less than the $87.4 billion estimated last month.
It was the smallest amount in a year and left inventories subtracting 1.62 percentage points from first-quarter growth. While the decline in exports was not as severe as initially thought, import growth was stronger.
That resulted in a trade deficit that sliced off 0.95 percentage point from GDP growth. A measure of domestic demand that strips out exports and inventories expanded at a 1.6 per cent rate, rather than a 1.5 per cent rate, indicating underlying strength in the economy.
Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 3.1 per cent rate. It was previously reported to have advanced at a 3.0 per cent pace. Spending was boosted by the Affordable Healthcare Act, which expanded healthcare coverage to many Americans. Business spending on nonresidential structures, such as gas drilling, contracted at a 7.5 per cent rate. It had previously been reported to have increased at a 0.2 per cent pace. While corporate profits recorded their biggest drop since the fourth quarter of 2008, the decline reflected the expiration of a depreciation bonus rather than fundamental weakening at US firms.
Reuters
