US economy shrank in winter but staging a spring rebound

29 May 2015 | Author: | No comments yet »

Economy shrank in Q1. Recession?.

WASHINGTON—The U.S. economy contracted early this year as harsh weather and a strong dollar sapped demand for American goods, underscoring the choppiness of an expansion that has struggled to lift off.The U.S. economy shrank 0.7 percent during the first three months of 2015, the Commerce Department said Friday in a widely expected revision of an earlier estimate that underscored ongoing economic vulnerability. Economists had expected the government to revise last month’s first estimate of anemic 0.2 percent growth in the nation’s gross domestic product _ the sum of U.S. goods and services- taking into account more information about international trade flows.

The revision, near economists’ expectation of a 1% contraction, showed how the world’s largest economy remains vulnerable to shocks as it struggles to regain its vigor. The dip, expected to be short-lived, marked the third quarterly contraction since the economy emerged from recession in mid-2009. “When you’re this weak, little things can knock you off course, whether it’s the Arab spring, the earthquake or ‘Snowmageddon,’ ” economist Dan Greenhaus of brokerage firm BTIG said. “We have an incredibly weak economy that’s susceptible to momentary interruptions.” Other economists said the report likely overstated the economy’s weakness because of what they suspect are flaws in the government’s ability to adjust data for routine slowdowns in activity tied to the seasons. Consumption and strong hiring continues to keep the U.S. economy skating clear of recession. “The combination of personal consumption and fixed investment, the most stable components of GDP, has grown 3.4 percent over the past four quarters,” said Furman, pointing to underlying growth. As I reported before the initial release of these numbers, many economists believe that there’s a glitch in how government statisticians calculate these numbers.

Other signs point to the economy humming along at a steady, though modest, growth pace—most notably in the jobs market, where layoffs are exceptionally low and hiring remains solid. Many economists predict the economy will rebound in the second and third quarters, as it did last year after a similar first-quarter economic contraction.

The unusually high snowfall this winter reduced GDP in the first quarter by 0.8 percentage point, estimates Macroeconomic Advisers, which also points to a February work slowdown at ports along the West Coast as having depressed growth. Current projections have the economy growing at between 2% and 3% in the current quarter. “I still believe that we will see a more vigorous recovery after Q1’s soft spot,” Amherst Pierpont Securities chief economist Stephen Stanley said in a note to clients. “Reports suggest that auto sales could jump, payroll gains were likely solid, and the housing sector is showing signs of life. “ Friday’s downgrade to GDP came after fresh data showing a wider trade deficit and a slower pace of restocking by firms than earlier estimates, damping demand at factories and service providers. And cutbacks in oil drilling, a result of low energy prices, could depress spending in the energy industry. “While the evidence of a second-quarter rebound hasn’t been overwhelming, we still think that the outlook for the economy is very encouraging,” Paul Ashworth, chief U.S. economist at Capital Economics, wrote in a research note. Of the 0.9 percent downward revision in first-quarter GDP, 0.4 percent came from businesses spending less on restocking their shelves; another 0.6 percent from a reduction in net exports.

Consumer spending, which drives about 70 percent of economic activity, slowed to annual growth of just 1.8 percent for the quarter, slightly below the government’s first estimate. But because every dollar you spend is a dollar of income to someone else, you can also measure the size of the economy by adding up people’s incomes.

The government said investment in the category that covers energy exploration plunged at an annual rate of 48.6 percent, the steepest drop since 2009, during the Great Recession. This alternative measure bears special emphasis right now because it appears to be unaffected by the seasonal adjustment problems that are muddling the spending-based estimate.

It’s a point that the Bureau of Economic Analysis has recently endorsed, announcing that as of July it will publish a new measure of gross domestic product: a simple average of the spending- and income-based measures. Jason Furman, the White House economist, estimates that the snow alone “reduced annualized growth by about a full percentage point this quarter.” The port strike might be worth another quarter or perhaps half a percentage point. Those factors include unusually cold weather that kept consumers home and shut down business operations, along with a labor dispute at West Coast ports that temporarily halted the flow of goods.

U.S. exporters have also been hurt by a strong dollar—tied to weak economies around the globe and a potential move by the Fed—that has effectively made their goods more expensive on the world market. To get a sense of the underlying momentum of business and consumer spending, economists often focus on those components that tend to predict future momentum. Even as the headline estimate of economic growth was revised downward, this measure of underlying momentum was revised up a tick, suggesting that all of the bad news in this report occurred in volatile measures that do not much speak to the economy’s prospects.

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