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U.S. Economic Growth Slows In First Quarter

U.S. Economic Growth Slows In First Quarter April 30, 2014Leave a comment

WASHINGTON—The U.S. economy nearly stalled in the first quarter as weakness overseas hurt exports and frigid weather curtailed business investment.

Gross domestic product, the broadest measure of goods and services produced across the economy, grew at a seasonally adjusted annual rate of 0.1% in the first quarter, the Commerce Department said Wednesday. That matched the second-weakest quarterly reading of the nearly five-year-old economic recovery.

Economists surveyed by The Wall Street Journal had forecast growth at a 1.1% pace for the quarter.

“Not a great start to the year,” said Lindsey Piegza, chief economist at Sterne Agee.

The broad slowdown halted what had been improving economic momentum during much of 2013. The economy expanded at a 3.4% pace in the second half of last year. The first-quarter reading fell far below even the lackluster average annual gain of near 2% since the recession ended.

The primary driver of the weaker-than-expected growth figure: Exports fell at the fastest rate since the recession ended, declining at a 7.6% pace in the first quarter. The number partly reflects shaky economies in Europe and Asia generating poor demand, rather than underlying weakness in the U.S.

Businesses also let supplies dwindle during the quarter, with the change in private inventories subtracting 0.57 percentage point from growth. An inventory buildup in the third quarter of last year boosted second-half growth. Now that stockpiles have been depleted, manufacturers might increase future output to meet demand.

While the latest figures are “certainly eye catching, we do not find it to be representative of the underlying health of the U.S. economy,” said Richard Moody, chief economist at Regions Financial Corp. “Anyone tempted to panic … should just take a breath.”

Mr. Moody expects growth to accelerate as the economy pulls out of the winter doldrums. He also noted that Wednesday’s report relies on estimated figures for March trade, inventories and construction spending. If those figures are stronger than estimated, the Commerce Department could raise the GDP reading next month. Other indicators, including retail sales and factory output, strengthened in March compared with earlier in the year.

While the severity of the first-quarter slowdown surprised many economists, an easing of growth was broadly expected because January through March were abnormally cold in much of the country.

Business spending on items such as equipment, buildings and intellectual property fell at a 2.1% pace in the first three months of the year. That was the first decline in a year and reversed in part the 5.7% gain the prior period. The slowdown in investment coincided with weaker hiring during the quarter.

The weather likely slowed consumer spending on goods, which rose at a mere 0.4% pace during the quarter. But households spent more on services-including energy to heat their homes and health care-causing total consumer spending to rise at a 3.0% pace, only slightly below the fourth quarter’s 3.3% rate.

Consumer spending was the “silver lining within a dour first-quarter growth report,” said Andrew Wilkinson, chief market analyst at Interactive Brokers LLC. But that enthusiasm is somewhat tempered because consumers tend to have little choice in spending on utilities and medical care.

The latest numbers continue a familiar pattern. The nation’s economic recovery, which started in mid-2009, has been marked as much for its choppiness as its slow pace.

At several junctures, consecutive strong quarters have raised hopes for a breakout-only to be upended by a slowdown. The overall gains have been too weak to push the unemployment rate back in line with historical norms. The unemployment rate in March stood at a still-elevated 6.7%.

Many economists believe the first-quarter pullback was a temporary speed bump. They expect demand that slowed in the winter to accelerate later in the year.

Before Wednesday’s report, forecasting firm Macroeconomic Advisers projected the economy would grow at a 3.5% pace in the second quarter and hold near that rate for the remainder of the year.

Overall government outlays continued to be a drag, but federal spending made a positive contribution to growth for the first time in six quarters. The pace of federal government spending had mostly curtailed growth since late 2010 because stimulus measures enacted during the recession were replaced with budget cuts known as the sequester.

As the effect of budget cuts fade, federal spending should boost growth this year. Federal outlays increased at a 0.7% pace in first quarter compared with an 12.8% decline in the fourth quarter of 2013, which included a 16-day government shutdown.

Residential fixed investment–spending on home building and improvements–declined at a 5.7% rate in first quarter. That was the second straight quarterly decline for the category, which had contributed to growth for the previous three years.

Cold weather likely halted some building, but other factors are slowing demand in the housing market. Mortgage interest rates were about a percentage point higher in the first quarter than a year earlier, making house payments more expensive for new borrowers. Rising prices and limited selection also could be dissuading families from moving. Spending on improvements and furnishings often follow home purchases.

The latest figures come as Federal Reserve officials conclude a two-day meeting Wednesday. The numbers aren’t likely to influence policy significantly, given the expectations for improved growth later in the year.

But officials remain concerned about inflation measures. Persistently low inflation could complicate the Fed’s decisions about how to wind down its bond-buying program this year and when to raise benchmark interest rates from near zero.

The personal consumption expenditure price index, the Fed’s preferred inflation gauge, advanced at an annualized 1.4% in the first quarter, the report said. That was a slight acceleration from the fourth quarter, but still below the Fed’s 2% inflation target.

Source: Wall Street Journal

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