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US Economy Shrank at 1% Rate in Q1

The U.S. 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.

Baldor Electric Co. employees Dave Johnston, left, and Steve Davis, right, work inside the company's factory in St. Louis
Baldor Electric Co. employees Dave Johnston, left, and Steve Davis, right, work inside the company’s factory in St. Louis (AP Photo/Jeff Roberson, File)

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 percent and 4 percent as pent-up demand by consumers fuels stronger growth. Analysts are also optimistic that growth will remain above 3 percent in the second half of this year, giving the economy the kind of momentum that has been lacking for much of the first five years of recovery from the country’s worst recession since the 1930s.

If growth does pick up, that should promote stronger hiring and help drive the unemployment rate down further. In one of the strongest signs of improvement, employers added 288,000 jobs in May, the biggest hiring surge in two years. That helped push the unemployment rate down to 6.3 percent, its lowest point since 2008.

The economy is facing fewer hurdles this year than last year, when government spending cuts and higher taxes trimmed growth by an estimated 1.5 percentage points.

A government budget truce has also lifted, at least through the rest of this year, much of the uncertainty that had been weighing on the economy over the potential threats of further government shutdowns or market-rattling battles over raising the government’s borrowing limit.

 

(Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed)

 

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