U.S. economy shrank at 0.7 percent rate in first quarter

Figure reflects a bigger trade gap and slower consumer spending

By Martin Crutsinger
AP Economics Writer

WASHINGTON (AP) — The U.S. economy went into reverse in the first three months of this year as a severe winter and a widening trade deficit took a harsher toll than initially thought.

The overall economy as measured by the gross domestic product contracted at an annual rate of 0.7 percent in the January-March period, the Commerce Department reported Friday.

The revised figure, weaker than the government’s initial estimate of a meager 0.2 percent growth rate, reflects a bigger trade gap and slower consumer spending. It marked the first decline since a 2.1 percent contraction in the first three months of 2014, a slump that was also blamed on winter weather.

Analysts generally foresee the economy growing at an annual rate of 2 percent to 2.5 percent in the current April-June quarter, with further strengthening later in the year. But they are also wary of ongoing risks, such as the strong dollar’s impact on the trade deficit and cutbacks in oil drilling that 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, said.

Much of the new-found weakness stemmed from a wider trade deficit, reflecting weaker exports and a bigger jump in imports than first estimated. Trade subtracted 1.9 percentage points from growth — the biggest drag in 30 years. American manufacturers have been struggling with a stronger dollar, which hurts exports by making their goods more expensive on overseas markets and makes foreign goods cheaper for American consumers.

Consumer spending, which accounts for about 70 percent of economic activity, slowed to growth of just 1.8 percent in the first quarter, slightly below the initial estimate. The government said consumers spent less on their cellphone services than first thought.

One of the biggest hits to the economy in the first quarter came from huge cutbacks in drilling activity by energy companies, the fallout from the big drop in oil prices over the past year. The government said that investment in the category that covers energy exploration plunged at a rate of 48.6 percent, the biggest drop since spring of 2009 when the country was still in recession.

The government also revised down its estimate of the boost the economy got from business restocking. The change should be a positive for second quarter growth, since it means businesses will not have as big a backlog of unsold goods.

Not all the revisions to the initial estimate showed weakness. Housing construction and business investment in equipment were both revised higher.

Though falling GDP can be a sign of a recession, economists see little cause for concern with the first quarter drop. They are forecasting solid GDP growth the rest of the year, with steady job gains propelling the economy. A harsh winter is gone. So is a labor dispute that slowed trade at West Coast ports. Home sales and construction are rebounding. Business investment is picking up.

Many economists also suspect that the government’s calculations have tended to underestimate growth in the first quarter of each year. The GDP has contracted in three quarters since the recession ended six years ago and all three declines came in the first quarter of the year.

While there is optimism that growth will revive as the year progresses, some sectors of the economy do remain subpar. Energy drillers, for example, have been damaged by persistently low energy prices and are still cutting jobs and slowing production, weakness that is expected to persist in the current quarter. The rise in the dollar is still making U.S. manufactured goods pricier overseas.

Yet the outlook has brightened considerably since winter. Most economists expect lower gas prices eventually to accelerate consumer spending, the main fuel for the economy.

“We got hit with a double-whammy in the first quarter,” said Sung Won Sohn, an economics professor at California State University, Channel Islands. “We had a lot of adverse factors, from the harsh weather and consumers unwilling to spend their gas savings to a stronger dollar and weak economies overseas making the trade deficit larger.”

So far, most consumers haven’t used their gasoline savings to spend much more on other goods and services. The average U.S. pump price reached $2.03 a gallon in January, the lowest level in eight years. Though the average has risen back to $2.74, according to AAA, that’s still nearly a dollar below its point a year ago.

“Even with the recent rise in gas prices, they are still well below the levels of a year ago, and eventually consumers will start spending those savings,” said Joel Naroff, chief economist at Naroff Economic Advisors.

Analysts also say that steadily solid hiring, which has helped cut the unemployment rate to a seven-year low of 5.4 percent, will continue to put money in more people’s hands and fuel spending gains.

Some of the first quarter weakness may be revised away by government statisticians, who are studying whether their methods for making seasonal adjustments tend to overstate slowdowns during winter. The Bureau of Economic Analysis has said some adjustments will be reflected in the annual updates to economic growth it will issue in June.

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