US economy shrank at 1% pace in 1st quarter

In this June 3, 2009 file photo, Baldor Electric Co. employees Dave Johnston, left, and Steve Davis, right, work inside the company’s factory in St. Louis. The US economy shrank for the first time in three years in the first quarter, underscoring its struggle to gain momentum nearly five years after exiting recession, data showed Thursday. AP PHOTO/JEFF ROBERSON

WASHINGTON—The US economy shrank for the first time in three years in the first quarter, underscoring its struggle to gain momentum nearly five years after exiting recession, data showed Thursday.

Economic output as measured by gross domestic product (GDP) fell at an annual rate of 1.0 percent in the first quarter, the Commerce Department said, sharply revising lower the initial estimate of 0.1 percent growth.

The Commerce Department’s revision was much worse than analysts expected; the consensus estimate was a 0.5 percent decline.

It was the second time the world’s largest economy has contracted since officially exiting severe recession in July 2009. GDP fell 1.3 percent in the 2011 first quarter.

“Negative GDP growth is rare in expansions, declines of more than a couple of tenths rarer still and two declines of one percent in one expansion unheard of until now,” said Chris Low of FTN Financial.

“It’s a reminder that the growth trajectory is flatter than normal, a consequence of an ongoing credit squeeze that has dragged on so long it is easy to forget how unique it is compared to past decades.”

The start of the year was marked by unusually severe winter weather in large parts of the country that disrupted transportation and kept many Americans hunkered indoors.

Analysts view the slump as largely weather-related after the economy grew 2.6 percent in the 2013 fourth quarter.

The Commerce Department said the first-quarter weakness was more than accounted for by a marked decline in inventory investment, especially by motor vehicle dealerships.

Inventory investment was revised down, particularly in retail trade, manufacturing, mining, utilities and construction.

Stripped of the inventory investment factor, GDP grew 0.6 percent in the first quarter, slightly below the 0.7 percent gain initially estimated.

Imports, which subtract from GDP, were revised higher.

Also contributing to the fall in GDP were declines in exports, business investment, state and local government spending and housing investment.

“Ouch. The bad news is that the headline GDP number is worse than consensus, but the good(ish) news is that almost all the hit is in the inventory component,” said Ian Shepherdson of Pantheon Macroeconomics in a research note.

2nd-quarter rebound seen 

Analysts said the drop in inventory investment sets the stage for more investment in the second quarter. “We still think Q2 growth of about 3.0 percent is a decent bet,” said Shepherdson.

The White House noted the first-quarter downward revision was due almost entirely to the lower estimate for the “highly volatile” inventories category.

The updated data show the economy “continues to recover from the worst recession since the Great Depression,” said Jason Furman, President Barack Obama’s chief economic adviser, in a statement.

“The president will do everything he can either by acting through executive action or by working with Congress to push for steps that would raise growth and accelerate job creation,” he said.

The Commerce Department also reported corporate profits tumbled 9.8 percent in the first quarter from the fourth quarter, the largest decline since the fourth quarter of 2008 in the midst of the financial crisis.

Corporate profits had increased 2.2 percent quarter over quarter in the final three months of 2013. Over the last four quarters, they were down 3.0 percent.

The Federal Reserve has shrugged off the weak first quarter as largely weather-related as it continues to taper economic stimulus amid the modest recovery.

The Fed has lowered its asset purchases from $85 billion a month in December to $45 billion in May in a measured series of $10 billion cuts, with the expectation the quantitative-easing program will be exited before the year ends.—Veronica Smith