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GDP contracts after US economy is battered by harsh winter

By
Associated Press
Published May 29, 2014, 9:36 a.m. ET

The US economy was battered even more than first suspected by the harsh winter, actually shrinking from January through March. But economists are confident the contraction was temporary.

The economy contracted at an annual rate of 1 percent in the first quarter, the Commerce Department said Thursday. That was worse than the government’s initial estimate last month that gross domestic product grew by a barely discernible 0.1 percent in the first quarter.

It was the economy’s first quarterly decline since a 1.3 percent drop in the first three months of 2011.

This year’s dip reflected slower stockpiling by businesses, a cutback in business investment and a wider trade deficit. Economists are looking for a strong rebound in the April-June quarter as the country shakes off the effects of a severe winter.

“The second estimate of GDP is backward looking,” said Dan Greenhaus, chief strategist at BTIG, in a note to clients. “We knew that weather dramatically impacted growth in the first quarter, and we fully expect a bounce back in the second quarter.”

In the fourth quarter, the overall economy had grown at an annual rate of 2.6 percent.

The first-quarter contraction primarily reflected a sharp slowdown in businesses stockpiling, which subtracted 1.6 percentage points from growth, a full percentage point more than the initial estimate. The trade deficit was slightly larger than previously thought. Business investment in structures fell at an annual rate of 7.5 percent in the first quarter, also worse than the initial estimate.

The report Thursday was the government’s second look at GDP, the country’s total output of goods and services.

Many economists believe that GDP will post a sizable rebound to growth of around 3.8 percent in the current April-June quarter and will remain above 3 percent in the second half of the year as the economy gets a boost from increased consumer demand, bolstered by stronger hiring.

In a separate report Thursday, the government said that applications for unemployment benefits, a proxy for layoffs, fell by 27,000 last week to 300,000. The result is near the lowest level in seven years.

The 1 percent decline in the first quarter was only the second negative quarterly GDP reading since the current recovery began in June 2009.

While one definition of a recession is two consecutive quarters of contraction in the GDP, there is no concern that a negative reading in the first quarter could be a sign the economy is about to topple into a downturn. The widespread belief among analysts is that the weakness in the first quarter was based on a variety of temporary factors that will be quickly reversed once the weather warms up.

Many economists estimate that the economy in the current April-June quarter is growing at an annual rate of between 3.5 and 4 percent as pent-up demand by consumers fuels stronger growth.