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Thursday 31 July 2014

US economy shrank in first quarter

Published 25/06/2014|16:32

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Economists said the severe winter kept Americans away from the shops and car dealers

The US economy shrank at a steep annual rate of 2.9% in the January-March quarter as a harsh winter contributed to the biggest contraction since the depths of the recession five years ago.

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But the setback is widely thought to be temporary, with growth rebounding solidly since spring.

The first quarter contraction reported today by the Commerce Department was even more severe than the 1% annual decline it had estimated a month ago.

Besides the harsh winter, much of the downward revision reflected a drop in healthcare spending. Another factor was a bigger trade deficit than initially estimated.

Though such a sharp decline would typically stoke fears of another recession, analysts see it as a short-lived result of winter storms that shut factories, disrupted shipping and kept Americans away from shopping centres and car dealerships.

They say the economy is rebounding in the April-June quarter, when many expect growth to reach a robust annual rate of at least 3.5%.

Most analysts also foresee the economy expanding at a healthy rate of around 3% in the second half of this year.

Reports on consumer spending, manufacturing and business investment have shown a solid rebound this spring. Orders for big-ticket manufactured goods excluding military hardware and for core capital goods, a proxy for business investment, rose strongly in May, a report also showed.

"We have ample evidence that the first quarter was just a temporary setback for the economy, and we are climbing out of the hole in the current quarter," said Stuart Hoffman, chief economist at PNC Financial.

Last quarter's 2.9% annual decline in economic activity, as measured by the gross domestic product, followed a 2.6% gain in the fourth quarter. It was the weakest showing since the economy shrank at a 5.4% annual rate in the first quarter of 2009 in the midst of the recession.

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