Economy shrank 0.7% in the first quarter

GTY 472264350 A FIN USA FL


The U.S. economy shrank in the first quarter as the nation’s trade deficit widened and business stockpiling slowed.

Gross domestic product — the value of goods and services produced in the U.S. — contracted at a seasonally adjusted annual rate of 0.7% in the January-March period, the Commerce Department said Friday. That’s well below the modest 0.2% growth the government initially estimated.

Economists expected the revision would show a 0.9% contraction, according to the median estimate of those surveyed by Bloomberg.

The report was the government’s second estimate of first-quarter GDP. It will publish a final estimate in June.

The downward revision largely can be traced to a trade gap that reached a seven-year high in March. A strong dollar is hobbling U.S. exports by making them more expensive for overseas customers while making imports cheap for U.S. consumers.

Imports increased 5.6% in the first quarter, compared to the 1.8% rise first estimated. Exports fell 7.6%, a bit more rapidly than initially thought.

Also, business stockpiling added 0.33 percentage points to growth in the quarter, compared to the 0.74 percentage points first estimated.

Consumer spending, meanwhile, rose even more modestly, at 1.8%.

One positive sign is that business investment fell just 2.8%, versus the 3.4% first thought. Equipment spending, a key measure, increased 2.7% rather than the 0.1% rise previously estimated. Business spending had fallen six straight months since last summer because of the strong dollar and oil prices that are dampening energy investment, but a report this week showed a nascent rebound.

Many economists say the first-quarter slowdown was temporary. A big reason imports spiked was the clearing of shipment backlogs after a labor dispute at West Coast ports was settled in February. And extreme winter weather was behind much of the drop in economic activity.

“The record cold winter in the Northeast and the slump in the shale oil industry were the principal reasons why first-quarter GDP apparently shrank by 0.7% annualized,” economist Paul Ashworth of Capital Economics wrote in a note to clients.

The slump also repeats a pattern of weak first quarters the past several years. In 2014the economy contracted 2.1% in the first three months of the year before posting a torrid six-month stretch. Some economists expect a similar rebound this year. Jim O’Sullivan, chief U.S. economist of High Frequency Economics, projects the economy will grow at a 4% pace in the second quarter and 2.9% in the third quarter.

Yet the economy’s weak showing early in the year will likely leave growth for all of 2015 at 2% to 2.5%, in line with the recovery’s modest gains so far and short of the solid 3% many economists had predicted.

Some economists, however, blame flawed estimates for the string of sluggish first quarters, noting job growth generally has been strong in recent months. A recent paper by the San Francisco Federal Reserve concludes that Commerce has under-estimated first-quarter growth the past several years because of inaccurate seasonal adjustments.




Leave a Reply

Your email address will not be published. Required fields are marked *