U.S. economy contracts in first quarter, but labour market firming

First-time applications for unemployment benefits decline 27,000
By Lucia Mutikani
|hrreporter.com|Last Updated: 05/29/2014

WASHINGTON (Reuters) — The U.S. economy contracted in the first quarter for the first time in three years as it buckled under the weight of a severe winter, but there are signs activity has since rebounded.

The Commerce Department on Thursday revised down its growth estimate to show gross domestic product shrinking at a one per cent annual rate.

The worst performance since the first quarter of 2011 reflected a far slower pace of inventory accumulation and a bigger than previously estimated trade deficit.

GDP growth was initially estimated to have expanded at a 0.1 per cent rate. It is not unusual for the government to make sharp revisions to GDP numbers as it does not have complete data when it makes its initial estimates.

The decline in output, which also reflected a plunge in business spending on non-residential structures, was sharper than Wall Street's expectations for a 0.5 per cent contraction pace.

The economy grew at a 2.6 per cent pace in the fourth quarter. U.S. Treasury debt yields fell slightly on the report, while U.S. stock index futures trimmed gains. The dollar fell against the euro.

But the decline in output does not appear to have persisted into the second quarter and the factors that held down the economy are temporary.

The economy should rebound strongly as they fade. Economists estimate severe weather could have chopped off as much as 1.5 percentage points from GDP growth. The government, however, gave no details on the impact of the weather.

Jobs marketin firming

In a separate report, the Labor Department said first-time applications for state unemployment benefits declined 27,000 to a seasonally adjusted 300,000 last week.

The four-week moving average for new claims, considered a better measure of underlying labour market conditions as it irons out week-to-week volatility, hit its lowest level since August 2007. That added to signs of strength in the jobs market.

Other data such as manufacturing have buoyed hopes of a strong rebound in growth in the second quarter.

Businesses accumulated US$49 billion worth of inventories in the first three months of the year, far less than the US$87.4 billion estimated last month.

It was the smallest amount in a year and left inventories subtracting 1.62 percentage points from first-quarter growth. But inventories should be a boost to second-quarter growth.

While the decline in exports was not as severe as initially thought, import growth was stronger. That resulted in a trade deficit that sliced off 0.95 percentage point from GDP growth.

A measure of domestic demand that strips out exports and inventories expanded at a 1.6 per cent rate, rather than a 1.5 per cent rate, indicating underlying strength in the economy.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 3.1 perc ent rate. It was previously reported to have advanced at a three per cent pace.

Spending was boosted by the Affordable Healthcare Act, which expanded health-care coverage to many Americans. Consumer spending had increased at a brisk 3.3 per cent pace in the fourth quarter.

Business spending on non-residential structures, such as gas drilling, contracted at a 7.5 per cent rate. It had previously been reported to have increased at a 0.2 per cent pace. The report showed corporate profits after tax plunged at a 13.7 per cent rate, the biggest drop since the fourth quarter of 2008.

Add Comment

  • *
  • *
  • *
  • *