US economy shrinks 1% over harsh winter

Barack Obama Points

The US economy contracted for the first time in three years in early 2014 after a much worse performance than originally feared.

Washington's commerce department said the world's biggest economy shrank at an annual rate of 1% during the first quarter – a period marked by an unusually harsh winter in some of the more populous states.

Wall Street had been braced for the revised data to come in below the first estimate of 0.1% annualised growth between January and March but was surprised by the extent of the decline.

Analysts are confident that growth will bounce back in the second quarter and pointed to the underlying strength of consumer spending during the period when the economy was contracting.

ING's James Knightley said most of the downward revision to growth had been caused by companies running down their stocks and said the contraction was not as bad as it looked.

Noting that many companies were likely to have run down inventories due to transport problems caused by the bad weather, Knightley added: "With demand indicators looking pretty good for the second quarter of 2014 we are expecting a much stronger outcome for GDP growth in the current quarter (4.5% annualised) with inventory rebuilding likely to play its part."

Paul Ashworth, chief US economist at Capital Economics, said the run-down in inventories in the first quarter would lead to the bounce-back in the second quarter being even bigger because companies would be rebuilding their stocks of goods.

The official data leaves the US one quarter away from the technical definition of a recession – two consecutive quarters of falling output – but Ashworth said this was not going to happen.

"For those worried about a recession, it's worth remembering that employment increased by nearly 300,000 in April and jobless claims dropped to 300,000 last week. Those numbers point to a recovery gathering some real momentum at last. We still expect second-quarter GDP growth to come in close to 3.5%."

Republicans seized on the news as evidence that President Barack Obama's economic policies were failing. "The president promised the American people an economy 'built to last,' but instead he's got us caught in a game of Chutes and Ladders: one step forward, two steps back. Americans asking 'where are the jobs?' deserve better than this new normal of fits and starts," House speaker John Boehner said in a statement.

The GDP report comes a week ahead of the US's latest monthly jobs report. In April the economy added 288,000 new jobs with gains across the board driving down the unemployment rate to 6.3%, its lowest level in six years.

PNC Bank chief economist Stuart Hoffman said he expected the Commerce Department would announce another 200,000 gain in its May nonfarm payroll report. "The trend in the unemployment rate remains down and we expect it to reach 6.1% by the end of this year," he said.

"I believe this real GDP decline, mostly due to the polar vortex, coiled the 'economic spring' even tighter for a sharp snap- back this quarter where I have an above-consensus forecast for a 4.0% annualized rise in real GDP. I expect real GDP growth to settle back down to near a 2.8% annual rate in the second half of this year," he said.

US stock markets shrugged off the news, rising marginally in morning trading.

Powered by Guardian.co.ukThis article was written by Larry Elliott, economics editor, for theguardian.com on Thursday 29th May 2014 14.20 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010

 

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