Economy shrank 0.7% in the first quarter

29 May 2015 | Author: | No comments yet »

Economy shrank 0.7% in the first quarter.

WASHINGTON,(Reuters) – The U.S. economy contracted in the first quarter as it buckled under the weight of unusually heavy snowfalls and a resurgent dollar, but activity has rebounded modestly.Trade was hit both by the strong dollar and the ports dispute, which weighed on exports through the quarter and then unleashed a flood of imports in March after it was resolved.

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. The government on Friday slashed its gross domestic product estimate to show it shrinking at a 0.7 percent annual rate instead of the 0.2 percent growth pace it estimated last month. The contraction, the U.S.’s third in the aftermath of the Great Recession, provides a troubling picture of an economy that many figured would get a lift from cheap oil, rapid hiring, and growing consumer confidence. Instead, consumers have proven cautious and fracking companies have frozen investment — all while a nasty winter caused havoc for transportation and construction and a strong dollar widened the trade deficit. A measure of domestic demand was revised up one-tenth of a percentage point to a 0.8 percent rate and business spending on equipment was much stronger than previously estimated, taking some edge off the slump in output.

Apart from the statistical quirk, the economy, which expanded at a 2.2 percent pace in the fourth quarter, was hammered by labour disruptions at West Coast ports. Also dragging on growth was a sharp decline in investment spending in the energy sector as companies such as Schlumberger and Halliburton responded to the plunge in crude oil prices. Many analysts expect the GDP to expand roughly 2 percent in the second quarter, while the Federal Reserve Bank of Atlanta takes an even darker view, predicting an expansion of just 0.8 percent. The MarketWatch survey estimates GDP will increase 3.2% in second quarter, but a new tracking tool created by the Atlanta Federal Reserve puts the gain at just under 1% with a month to go.

That was the largest drop in a year and the second straight quarterly fall, as the dollar weighed on multinational corporations and oil prices hurt domestic firms. Still, perhaps the biggest surprise of the past six months has been the muted pick-up in consumer spending, which accounts for about two-thirds of the economy. Multinationals like Microsoft Corp , household products maker Procter & Gamble Co and healthcare conglomerate Johnson & Johnson have warned the dollar will hit sales and profits this year. Consumers, instead, have taken the money saved at the gasoline pump and used it to pay back debt or rebuild savings, according to government and credit card data.

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. Unlike 2014, when growth snapped back quickly after a dismal first quarter, the dollar and investment cuts by energy companies continue to hamstring activity. Some of the sluggishness during the winter months was likely influenced by temporary factors, including a series of major snowfalls in the Northeast and a port strike on the West Coast. Even as the economy has slowed, the labor market has remained fairly strong, with companies hiring at a pace well above what has been seen for much of the recovery. In the opening months of 2015, exports sank 7.6% while the increase in imports was raised to 5.6% from a preliminary 1.8%, revised government data show.

The dollar rally has faded and the greenback is about 4 percent off its peak in March against the currencies of the main U.S. trading partners, easing pressure on U.S. exporters.

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