The U.S. economy contracted in the first quarter of 2014, a seriousbut likely briefstumble for a recovery that has struggled to find its footing since the recession ended almost five years ago.
Gross domestic product, the broadest measure of goods and services produced across the economy, contracted at a seasonally adjusted annual rate of 1% in the first three months of the year, the Commerce Department said Thursday. It was the first time economic output contracted since the first quarter of 2011, when it declined at a 1.3% pace.
"Severe weather conditions had a deeper impact on first quarter economic activity than previously estimated," said Robert Hughes, a senior research fellow at the American Institute for Economic Research. But, he said, "Much of the weakness will likely result in pent-up demand and should reverse in the second quarter."
Government economists had previously estimated GDP slowed to a 0.1% growth rate in the first quarter as harsh winter weather disrupted work sites, curtailed foot traffic at retail stores and snarled transportation networks across much of the U.S.
The newly revised estimate incorporates additional economic data released in recent weeks. Higher-than-expected imports and slower-than-expected inventory growth dragged the economy into negative territory.
But the weakness of the first quarter "was clearly exaggerated, particularly by weather effects," High Frequency Economics chief U.S. economist Jim O'Sullivan said in a note to clients. He and other economists predict the U.S. economy will bounce back in the second quarter, though it isn't clear how strong of a rebound is in the works. Gauges of industrial production, retail sales and durable-goods orders all posted solid gains in February and March before weakening in April.
U.S.-based corporations, meanwhile, posted slightly lower profits during the first quarter. The Commerce Department said corporate profits after tax, without inventory valuation and capital consumption adjustments, totaled a seasonally adjusted annual rate of $1.880 trillion for the quarter. That is down from profits of $1.905 trillion in the fourth quarter of 2013.
The three-month contraction isn't expected to herald a prolonged downturn, though it's rare for the economy to shrink outside of a recession.
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Many economists had hoped 2014 would be a breakout year for growth, encouraged by an economy that grew at a 3.4% pace in the second half of 2013. Those hopes have been deferredif not yet dashedby the latest stretch of weakness.
Consumer spending, which accounts for more than two-thirds of U.S. economic output, grew at a 3.1% pace in the first quarter, revised up from an initial estimate of growth at a 3% pace. Spending on services, like health care and household heating, grew at a 4.3% pace while spending on physical goods rose at a more modest 0.7% pace.
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U.S. exports fell at a 6% pace in the first three months of the year, a shallower fall than the initial estimate of 7.6%. But imports, which are subtracted from the GDP calculation, rose at a 0.7% pace, compared with the initial estimate that they declined at a 1.4% pace. International trade overall was a drag on the economy, with net exports subtracting 0.95 percentage point from GDP growth.
A big buildup in private inventories boosted economic growth in the third quarter of 2013, but left a hangover that weighed on growth in the first quarter of 2014. Inventories subtracted 1.62 percentage points from GDP growth, compared with an initial estimate of 0.57 percentage point subtracted from growth.
The drag from inventories may largely past at this point. "The pace of inventory-building has fallen by more than half since its [third-quarter] peak, and is now below the rate needed to keep inventory-to-sales ratios steady. That means the risk of a further significant inventory hit to [second-quarter] growth is quite small," Pantheon Macroeconomics chief economist Ian Shepherdson said in a note to clients.
